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RUB: Darkest before the dawn?

The price swings in yesterday’s trading session were remarkable. On the back of the CBR’s decision to hike rates by 6.5pp, USDRUB declined to 58.20 in the morning, only to touch 79.15 just hours later. The intraday move in USDRUB was therefore some 36%. We understand that the CBR did not conduct interventions (or if it did, in low volumes), because MICEX turnover for the whole day was just USD 5.9bn. By the end of the day, RUB lost 5.4% against USD (67.91) and slipped 5.7% vs. EUR (84.96). Meanwhile, other commodity-based currencies traded on a stronger footing, despite a 1.1% decline in Brent to USD 59.2/bbl. NOK and NZD firmed 0.7-0.8%, while NGN closed 0.2% in the black. The EM FX index inched up 0.2%, with ZAR and TRY trading up at 0.9% and 0.5%, respectively, which was offset by a 1.6% decline of BRL. The CBR’s one-week FX repo auction for USD 2.0bn saw just USD 733mn in demand, so all bids were covered at an average rate of 1.54%. As we have made clear before, we believe that the relatively low allocation in the FX auction is due to collateral constraints. Overall, we believe that there is a good chance that the RUB yesterday touched its low watermark: the CBR’s rate hike made it one of the highest yielding currencies worldwide, while CPI is likely to remain in the single digit zone at the end of next year. Meanwhile, Alexey Ulyukaev, the Minister of the Economy, said that the government would take steps to underpin financial stability. In addition, taxes are likely to provide support for the FX. Hence, in the medium-term, we expect some RUB recovery, because it is fundamentally undervalued, in our view: we estimate the fair USDRUB rate at 62.0 if the Urals price fell 40 USD/bbl. On our numbers, therefore, RUB is trading as if crude were priced at USD 20-30/bbl. We recommend opening some shorts in USDRUB, with a close stop-loss due to poor market liquidity. The key risk factor now is in household FX demand, which could sustain the pressure on the exchange market irrespective of fundamentals.
Maxim Korovin, Tatyana Zueva
VTB Capital analyst

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