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CBR held a rate meeting today: Russian central bank maintained its benchmark interest rate at 6 percent during its March meeting, saying the ruble’s depreciation is a momentary pro-inflationary factor that might prompt annual inflation to exceed the target level this year. Policymakers' main concerns were the spread of the coronavirus epidemic and the sharp drop in oil prices, saying the dynamics of domestic and external demand will exert a meaningful constraining influence on inflation on the back of a pronounced slowdown of global economic growth and increased uncertainty. The bank also said annual inflation will return to 4 percent in 2021.
No change in rate was delivered which was as per common consensus. While the sharp depreciation of the rouble is not really a negative when the oil price has declined by a huge extent, this is Russia’s natural stabiliser mechanism against lower oil price – the elevated volatility levels of USDRUB will likely prevent the uber-cautious CBR from cutting rates just yet. There were market expectations for rate hikes in the medium-term because of the weaker rouble.
We, however, reckon that CBR will resume cutting rates as soon as risk premia, volatility and the oil price stabilise. Russia was heading towards below-target inflation leading up to this shock; and Elvira Nabiullina was probably beginning to worry about outright deflation. This is why she stepped up the pace of rate cuts as she did. Add to this the present deflationary shock from the oil price, and rate cuts are highly likely after a brief pause.
In fact, the economy will need support much like other emerging markets around the world, hence delaying too much could be viewed as some sort of failure on the part of the central bank.
RUB continues to screen favorably when compared to high-yielding EM peers, given a current account surplus, positive real yields and a supportive oil price environment. Although we expect to see further RUB outperformance, the already high levels of investor positioning remains the key risk, in our view.
Rather, the news is broadly neutral for the rouble, with some upside on account of the new PM being likely to ramp up fiscal spending promptly.
Consider: 3M delta-hedged USDRUB 1*2 ratio call spread (ATM/25D) in vega notionals @9.65ch against @10.9/11.3 indicative.
Alternatively consider a RUB – ZAR RV trade, supported by the earlier screener on skews: Sell 3M delta-hedged USDRUB 25D call @10.9/11.3 and hedge it with 3M delta-hedged USDZAR 25D call @16.325/16.725, equal vega. Courtesy: JPM
