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Contemplating below explained macroeconomic Russian factors, we maintain medium weights for RUB in the JP Morgan’s (JPM) GBI-EM Model portfolio, but are bearishly biased, holding USDRUB call spreads. YTD the ruble has been the strongest performer in EM FX, with a spot around +7.2% stronger against USD. However, in our view risks from current levels are skewed to the downside, given expensive valuations and geopolitical uncertainties. Accordingly, we hold 26-July-19 USDRUB 67/71 1x1 call spreads.
Fundamentals are favorable. Inflation has now likely passed its peak, falling to 5.2%yoy in April, and JPM came up with their notions that there is scope for credible easing expecting two 25bp cuts in June and September of this year. The current account should remain a source of support, with our economist forecasting a 6.0% of GDP surplus in 2019. In addition, Russia’s fiscal surplus is also forecast to rise to 2.9% of GDP for 2019 (from the 2.6% in 2018), with the structural consolidation required by the budget rule essentially achieved.
However, both valuations and positioning appear stretched. Following the strong start to the year, RUB screens expensive in BEER FV model. In our preferred methodology to take the budget rule into account, RUB’s real effective exchange rate currently screens 9.5% overvalued. And geopolitical concerns remain. Geopolitical risks continue to linger, and if were to materialize, could generate bouts of capital outflow pressure. With the budget rule in place, our economist forecasts the CBR to purchase around $67bn of FX on behalf of the budget rule in 2019, from the $100bn projected current account surplus. This view does not leave a strong buffer to deal with such potential capital outflow bouts. Courtesy: JPM
Currency Strength Index: FxWirePro's hourly USD is flashing at -59 levels (bearish), while articulating at (10:40 GMT).
For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex
