Henrik Gullberg, Research Analyst at Nomura, suggests to buy a 3m USD/RUB 60/57 call spread for an indicative 1.86% of notional (spot ref: 56.79) and lists down the reasons behind the call.

Key Quotes

“Russia’s recent revised budget for 2017 came with a very small upward revision to the oil output number and a higher oil price assumption for the year, with the oil price in RUB terms revised up by more than 8% to RUBOIL2,928 from RUBOIL2,700 previously.”

“The small upward revision in oil output, coupled with the upward revision in RUBOIL, means the budget is reliant on higher RUB oil revenues. This in turn means Russia needs the OPEC production cuts to be adhered to; if not, RUB needs to weaken to protect the fiscal position. This suggests    correlation with crude will become increasingly asymmetrical, rising when crude is trading around $50 or below, while moderating at higher levels.”

“At current levels RUBOIL is hovering just below the 2,928 budget minimum, suggesting that unless the oil price rises, RUB needs to weaken, with the fiscal      8.00-58.25. Also, over the past six months RUBOIL has averaged around 12% above the 2,700 minimum for the old budget. Simply as a comparison, assuming a similar cushion under the new budget would imply a RUBOIL rate around 3,270 and an equilibrium USD/RUB exchange rate around 64-65.”  

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