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CBR Governor Elvira Nabiullina's hint yesterday that CBR could cut rates by 50bp at its July meeting due to weakness in growth comes as a mild surprise, and frankly may not be fully consistent. It is widely acknowledged that Rosstat's GDP data are in transition at the moment and the sudden drop in growth rate between Q4 2018 and Q4 2019 cannot be interpreted literally. Hence, pointing to recent growth slowdown as a reason to cut rates extra quickly appears curious.
A perspective is that this is more a reaction to ruble appreciation in recent weeks because of a dovish world outlook - CBR is reluctant to accept too rapid currency appreciation and therefore, may now front-load its rate cuts. Still, the implication of this signal is modest because analysts are unlikely to significantly revise their targets for the end of the forecast horizon, although the timing may now change. The announcement is therefore only mildly RUB-negative.
We remain MW RUB in the GBI-EM Model portfolio, but are bearishly biased, holding USDRUB call spreads. YTD the ruble has been the strongest performer in EM FX, with 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. 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 is our view does not leave a strong buffer to deal with such potential capital outflow bouts. Accordingly, we hold Aug-19 USDRUB 63/68 1x1 call spreads (at spot reference: 63.611 levels). Courtesy: JPM & Commerzbank
Currency Strength Index: FxWirePro's hourly USD spot index was at -25 (mildly bearish) while articulating at (13:32 GMT).
For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex
