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The Bank of Russia raised unexpectedly its benchmark one-week repo rate by 25 bps to 7.75 percent on December 14th, saying the decision is aimed at limiting inflation risks that remain elevated, especially over the short-term horizon on the back of the upcoming VAT rate increase. Policymakers expect annual inflation to be 5-5.5 percent by the end of 2019, before returning to 4 percent in 2020.
The ruble has been the top performer among EM currencies over the past month, which is surprising given the lingering oil price and sanction risks weighing against it.
A further rate hike by CBR could further bolster this performance in the near-term but that seems unlikely event. A non-trivial proportion of analysts do expect further hikes.
The major drivers predominantly for a further rate hike:
1) Potential ruble weakness/volatility if the oil price fails to move higher even after OPEC production cuts.
2) High likelihood of fresh sanctions in the new year which could rock the currency.
3) Pre-empting an assumed Fed rate hike in December.
Top this off with CBR governor Nabiullina's remark – that the market should not anxiously scrutinise every small rate step as these are unlikely to have any effect on the economy – and these made the 25bps rate hike today. This should be the last one in this cycle and the next move in rates could be down. The above reasons are not very strong because growth in Russia is quite anaemic and inflation below target – there is no strong reason why CBR should be so anxious about every little ruble volatility either.
Trade tips: At spot reference: 66.687 levels, 1m1w USDRUB 1x1 put spread (67.057/64.14) is advocated. Courtesy: Commerzbank
Currency Strength Index: FxWirePro's hourly USD spot index is inching towards 68 levels (which is bullish), while articulating (at 13:19 GMT).
For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex
