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We remain MW RUB, but are bearishly biased, holding USDRUB call spreads. YTD the ruble has been the strongest performer in EM FX, with a spot around +7.5% stronger (vs USD).
However, in the assessment of risks from the prevailing levels are skewed to the downside, given expensive valuations, a non-conducive technical backdrop, and geopolitical uncertainties.
Accordingly, we hold 26-July-19 USDRUB 67/71 1x1 call spreads, entered at the ending of March.
The valuations are one of the most expensive in EM. Following the strong start to the year, RUB screens expensive in our BEER FV model, and is one of the richest in EM.
In the preferred methodology to take the budget rule into account, we use a weighted average of the current oil price (1/3) and the budget rule oil price (2/3). Using this adjustment, RUB’s real effective exchange rate currently screens around 8% overvalued (refer to 1st chart).
The positioning has become somewhat stretched out. Ruble positioning has been steadily rising, with our J.P. Morgan Client survey for April showing an increase to +1.8, the highest level since July-18.
In addition, IMM data suggests a much more extended speculative longs in RUB (refer 2ndchart). This data can be very volatile, but our informal feedback would also indicate outright FX longs have risen.
Finally, geopolitical risks remain a key concern. 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 $67bn of FX on behalf of the budget rule in 2019 from the $100bn projected current account surplus. In a way, this does not leave a strong buffer to deal with such potential capital outflow bouts. Courtesy: JPM
Currency Strength Index: FxWirePro's hourly EUR is flashing at 31 (mildly bullish), while the hourly USD spot index was at 34 (mildly bullish) while articulating (at 13:04 GMT).
For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex
