Russia: CBR rate decision finely balanced and RUB now overvalued vs oil - TDS

Paul Fage, Senior Emerging Markets Strategist at TDS, thinks that it is something of a 50/50 bet as to whether or not the CBR cuts its Key rate, currently 10%, on Friday and if they do cut then TDS expect 25bps.

Key Quotes

“The statement of last Board meeting was very cautious, saying that the likelihood of any rate cut in H1 had fallen This more cautious stance was largely driven by concerns about the possible impact on the ruble of a faster pace of Fed rate hikes and also, perhaps, the impact of FX purchases by the Finance Ministry. However, in spite of a Fed rate hike and FX purchases, the ruble has performed well.”

“Inflation performance has continued to be good, falling to 4.6% Y/Y in February. So, there is little fundamentally in the way of the CBR cutting this Friday. But the CBR might think that a cut would represent too abrupt a shift in stance compared in their prior guidance and remain on hold. If they do this then we would expect the statement to become clearly more dovish, flagging the possibility of an imminent rate cut.”

“We think whether the CBR cut on not on Friday will have limited impact on the ruble. However, given the current level of oil prices we think that the ruble looks rich relative to the US dollar. Therefore, although we remain positive on oil, we recommend closing out long ruble positions.”