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The Russian inflation data surprised to the downside in June, moderating from 5.1%y/y to 4.7%y/y; core inflation moderated to 4.6% from 4.7%. Some volatile food prices, for example, fruit and vegetable prices, played a role in the headline decline – but, even without this effect, inflation is indeed beginning to show signs of peaking as CBR had promised.
This will increase CBR's confidence that the VAT hike this year has really not had any lasting impact, which means that rates can be lowered further as and when the CB chooses. We expect another 25bp rate cut on 26 July.
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 does not leave a strong buffer to deal with such potential capital outflow bouts. Accordingly, (at spot reference: 63.611 levels), we advocated Aug-19 USDRUB 63/68 1x1 call spreads, we now hold the same positions as further upside risks are foreseen. Courtesy: JPM & Commerzbank
