Trading flows remained relatively low yesterday, with MICEX recording a total USDRUB turnover of only USD 3.2bn. Nevertheless, there was plenty of trading action: in the morning, RUB fell deeply into the red, trailing sluggish oil market performance, and by the middle of the day it had touched 66.50. However, later, crude jumped sharply, with spot Brent closing 2.8% higher, at USD 47.6/bbl, while the nearest futures gained 4.5%, settling at USD 48.7/bbl. Subsequently, RUB rallied to close 0.9% stronger against USD at 64.65. At the same time, NOK surged 1.8% and the EM FX index firmed 0.8%, with MXN and BRL gaining 0.9-1.0%, and ZAR strengthening 0.8%. Therefore, RUB’s performance was generally in line with its peers. We highlight that previously RUB had lagged upward oil movement, so we view yesterday’s performance as a positive sign. If the oil market is at least stabilising at USD 45/bbl, we believe that a RUB rally would have more room to go. Even excluding one of the highest carries worldwide, the market’s positioning is one-way now (everybody long USDRUB) and heavy oil-related taxes lie ahead, while the cost of RUB corporate lending has soared. In addition, there are no issues with USD liquidity on the interbank market – thanks to the USD 20.8bn allocated by the CBR in FX repo – as illustrated by the tight spread between the overnight FX swap and RUONIA (between zero and minus 50bp, we estimate). Hence, we believe that RUB might be passing a tipping point here; however, oil stabilisation would be essential for that.
Separately, MinFin yesterday made several comments regarding the usage of the Reserve Fund. Previously, MinFin had reserved the right to use up to RUB 500bn from the Fund to cover the budget deficit this year. This raised the question of how the Ministry would convert it in such an action, since the Reserve Fund is part of the country’s international reserves. According to yesterday’s comments, MinFin is to ‘sell’ FX directly to the CBR, so it would be neutral for the FX spot market, but positive liquidity wise. MinFin plans to allocate the received funds to bank deposits in the medium-term, before using them to cover budgetary outlays. Finally, it was announced that Dmitry Tulin would take over from Ksenia Yudaeva’s responsibility for monetary policy, while Yudaeva would focus on financial stability and macro strategy.