FxWirePro: CBR’s Cushions Ruble Momentarily Through FX Reserve – Uphold USD/RUB Options Positions

CBR governor Elvira Nabiullina held a press conference last Friday, where she de facto confirmed that the central bank was ready to resume cutting rates. This is significant because CBR had paused rate cuts last month because of elevated RUB volatility. EM FX volatility still remains elevated; but, it appears to be calming down since its peak of late March. In particular, the rouble has appreciated sharply also because the impasse between Russia and Saudi Arabia surrounding OPEC+ output curbs was resolved. 

Meanwhile, other peer central banks have implemented sizeable rate cuts and QE support packages and CBR is now lagging behind. These constitute enough triggers why CBR might want to resume cutting rates and introduce additional relief measures, such as an RRR cut or suspension of capital adequacy norms. At last week’s press conference, Nabiullina remarked that the MPC would consider cutting the benchmark rate at Friday’s meeting; she added that the size of the cut could also be open to debate (implying that a 50bp cut is also possible). 

On the other hand, she hinted that inflation may accelerate in the near-term and that CBR is not ready to launch other QE steps just yet. Based on the guidance, we stick with our existing base-case that the central bank will lower the benchmark rate by 25bp on Friday. Despite Nabiullina’s lukewarm response to QE measures, we would not rule out an RRR cut either.

Finally, CBR now provides FX reserves support to RUB both through the budget mechanism and through additional FX sales when oil prices fall sub $25pb for Urals. So far, CBR sold $3.7bn since March 11. 

Moreover, OPEC+ agreement should provide a backstop for both oil and in turn RUB. Our commodities team believes enough was done to keep storage maxing out (see here). This should hold the market over until demand hopefully begins to recover with the forecast for Brent to average $27pb in Q2. 

RUB still screens slightly cheap. The JPM’s BEER FV model points to an undervaluation of 2.1%, which compares to a 5% undervaluation when we entered the OW position on April 2 and to a peak undervaluation of 11.2% on Mar 30. The undervaluation is now quite small, which suggests unless/until oil prices rally more substantially, most of the gains are likely on an RV basis, in our view. 

We considered 3M delta-hedged USDRUB 1*2 ratio call spread (ATM/25D) in vega notionals @9.65ch against @10.9/11.3 indicative, it’s been functioning as per our expectations so far, we wish to uphold the same strategy contemplating above fundamental driving forces. Courtesy: JPM