Short USD/RUB for a move towards 52.50 – Danske Bank

Analysts at Danske Bank recommend selling USD/RUB spot for a move towards 52.50 because of attractive carry-to-risk, stable oil price and Russian recovery which are all set to support RUB.

Key Quotes

“USD/RUB lower on high rates and Russian recovery

  • The rouble saw a brisk start to 2017, as markets firmly expected US President Donald Trump to lift anti-Russia sanctions imminently – or at least improve the US-Russia relationship. However, following pressure from Congress in August 2017, Trump had to sign into law a new anti-Russia bill, which could introduce new sanctions by the end of January 2018. At the same time, markets started to price the Russian Ministry of Finance (Minfin) introducing a new FX purchasing rule, which should increase FX purchases (RUB selling), if the price of crude oil continues to climb higher (currently Minfin is buying FX for around RUB121bn monthly, as Brent remains at USD62/bl). This supported a delinking of the RUB from oil prices.
  • This said, we think the detachment of the RUB from crude prices recently despite an improving Russian growth outlook has come a bit too far and we look for the oil price to average USD63/bl in 2018 (up from USD54/bl in 2017). Moreover, conservative fiscal and monetary policy, combined with a solid current-account surplus, leaves the RUB undervalued against the USD over the medium to long term, in our view.
  • With the global business cycle set to remain constructive for risk assets, we generally see value in FX carry trades going into 2018. We expect the economic recovery in Russia to continue after years of sub-par economic growth and we expect Russia’s economy to expand 1.9% y/y in 2017 and 2.0% y/y in 2018. Further, the RUB still provides a decent carry versus the USD. Thus, from both a fundamental point of view and a carry-to-risk perspective, we think RUB is one of the best carry picks within the emerging market universe.
  • According to the latest CIA data, Russia’s government debt-to-GDP stands at 10%. At the same time, the government has been shifting into local-currency debt, diminishing the share of FX-denominated debt. Many large Russian corporates, being subject to Western sanctions, saw significant deleveraging through FX debt redemptions and poor FX borrowing over 2014-17. Thus, the economy’s exposure to USD debt and the Fed’s monetary tightening has become one of the lightest in the emerging markets space. It is possible the USD stands to suffer further from a ‘Fed inexperience risk premium’.”

Bullish RUB on carry, oil and recovery but sanctions a risk

  • On the whole, we see clear potential in the RUB to strengthen against the USD in 2018. While Russia’s central bank (CBR) is set to ease its monetary policy gradually, this is already largely priced in the market and, given the CBR’s ‘fear’ of inflation, we see risks skewed mainly towards the CBR cutting rates less aggressively than the market currently expects. Moreover, the outlook for an oil price above USD60/bl is another RUB positive factor. While possible anti-Russia sanctions from the US are a risk, if not realised in early 2018, RUB would have decent potential to strengthen against the USD.
  • All in all, we recommend selling USD/RUB with a target of 52.50 (a potential spot gain of 11.87%, excluding carry) in order to benefit from a stronger rouble next year and pick up a healthy carry (approximately 5% annualised); we put a stop-loss at 61.85. Apart from US sanctions a key risk is OPEC+ failing to agree to an extension of output cuts in June next year, as this would weigh on oil prices.”

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