The CBR remains hawkish. The central bank has accrued significant inflation-fighting credibility by maintaining a hawkish stance in the face of improving inflation dynamics. JPM expects rate cuts to restart in June, with a total of 150bps of easing in the year, although risks are skewed slightly to the downside, according to our economist.

The recommencement of FX interventions may lead to near-term weakness. The CBR and MinFin have reintroduced an FX intervention scheme, with the intention of smoothing the impact of volatile oil prices on the economy and government finances.

As a result, we stopped out of long USDRUB positions earlier this week, but ruble now looks expensive to both our short term and long-term valuation models; hold USDRUB 1x1 call spreads.

The original recommendation to enter bearish RUB positions was in large part predicated on CBR FX interventions acting as a catalyst to unwind large long positions.

However, a hawkish CBR, alongside resilient oil prices and general EM FX strength, have helped RUB to appreciate in the previous two weeks.

For now, we think that the impact of a hawkish CBR is likely to dominate the impact of FX purchases.

We, therefore, do not advise buying spot fx exposure and stopped out of our long USDRUB position. Instead, we hold on to 2m USDRUB 1x1 call spread for now for two reasons. The Central Bank of Russia kept its benchmark one-week repo rate unchanged at 10 percent on February 3rd, as widely expected, and signalled the possibility of further cuts in the first half of 2017 has diminished, given the internal and external developments.

First, the ruble looks expensive on both our short-term (3.3%) and long-term (7.5%) models (refer above figure).

Second, the current account deteriorates going into Q2 (see above figure, Russia recorded a Current Account surplus of 7800 USD Million in the fourth quarter of 2016), at which point the technical backdrop for ruble becomes less supportive and CBR interventions should have a greater impact on the spot exchange rate.