FxWirePro: Strategic Options Structures to Trade and Hedge USD/RUB on CBR’s hawkish rhetoric

The Russian central bank hiked rates by 25bps on Friday, in line with our expectations. While the median consensus had been for no change, the market was heavily split with neither side having a strong conviction - hence, the final outcome did not affect the ruble. Our own reasoning had been that CBR would not want to fall too far behind the Fed in raising rates. What was slightly surprising from the new projections and statement is that CBR maintained a 5.0%-5.5% inflation forecast for end-2019 and, in fact, see upside risk to this forecast. This is despite the oil price no longer trending up, as had been the case a quarter ago, but having fallen considerably since October. 

Our own inflation forecast for end- 2019 is a substantially weaker 2.8% - and from this lower level, one can reasonably see upside risk in the event that the US implement unexpectedly harsh sanctions next year. Despite the hawkish rhetoric and CBR saying that it may need to hike again depending on inflation performance relative to forecast, our base-case is that no further rate hike will be needed in this cycle. We see inflation moderating noticeably through H2 2019. Since Russia's real interest rate would rise as a result, the RUB is likely to hold well against the USD. Hence, we see USDRUB sideways at 67.00 by end-2019. 

Trade tips: At spot reference: 66.521 levels, on hedging grounds, 1m1w USDRUB 1x1 put spread (67.057/64.14) is advocated. 

On trading grounds, we advocate initiating strangle shorts strategy: As you could observe the swings in the major trend have been oscillating between Major trend wedged between 70.637 and 64.852 from last 3-4 months levels, it is wise to deploy (0.5%) out-of-the-money call and (0.5%) out-of-the-money put options of 1m tenor. The strategy can be executed at the net credit and certain yields would be derived in the form of initial premium received as long as the underlying spot FX remains between OTM strikes on the expiration.Courtesy: Commerzbank

Currency Strength Index: FxWirePro's hourly USD spot index is inching towards 6 levels (which is neutral), while articulating (at 13:47 GMT). 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex