Ruble to appreciate on CBR’s accumulation of FX reserve

We consider the result of CBR rebuilding its international reserves to act positively on ruble, additionally rate cuts, decline in inflation and its expectations.

Mounting FX reserves: CBR announced that it will resume accumulating FX reserves on a daily basis in increments of USD100- 200 mn.

However, at this accumulation pace and current reserves at USD360.5bn, it will take CBR two years to reach a level above USD500bn in reserves. Since resuming its build-up of reserves, the ruble has been depreciating against the US dollar.

CBR's monetary easing: In addition to building up reserves, we expect CBR to continue cutting its key rate in the short-term on the back of a contraction in economic activity.

GDP consensus: Market consensus and IMF are forecasting real GDP YoY to decline by -4% and -2.4% in 2015, respectively. Q1 real GDP YoY already showed signs of contraction at -1.9% (against -2.6% for market consensus).

Industrial Production: Recent IP came in at -4.5% on YoY basis. A dip in consumer demand is likely to follow and further exert downward pressure on growth.

Inflation: Recent headline inflation came in at 16.4% YoY. Market consensus is 15.9% YoY for May. Weekly CPI has remained at 0.1% for the past 5 consecutive readings which is a decline from 0.9% in February.

Any rate cut decision will absolutely depend on the level of exchange rate and the inflation trajectory.

Well, we expect USD/RUB to remain in range of 54.10 to 56 by end of Q2 and to then gradually appreciate to 52 by year-end. We estimate current fair value for USD/RUB to remain at 54 levels.