Friday's session in the FX spot market was anything but dull. Trading flow of USD 5.7bn is a good illustration of a shake-up in the market, since the average daily USDRUB turnover in January was near USD 3.0bn or even less. In the morning, RUB kicked off on a softer footing. Later, the unexpected 200bp rate cut by the CBR reignited pressure on the exchange market. RUB weakened 2.5% after the CBR's announcement, with USDRUB eventually touching 71.50.
The regulator cut the key rate 200bp to 15.0%. All other rates were moved respectively. The CBR’s press release clearly reflects a change in approach, or circumstances, or both. If, previously, the reaction function has been ‘we first see, then act’, the regulator is now prepared to give a situation the benefit of the doubt and rely on forecasts, not hard data, with regard to how CPI moves. It expects disinflation in the next 12 months, saying that CPI will be lower than 10% in January 2016. In the CBR’s view, December’s rate hike anchored inflation expectations and it was enough to re-balance the banking system through higher savings. On the other hand, the CBR projects a 3.2% GDP drop in 1H15. Combined, these considerations justified the rate cut.
However, in the evening RUB turned a corner as the crude oil market bounced; in particular, Brent rallied 8.4% to close at USD 50.77/bbl, while the nearest futures (CO1) moved up to 52.99 (+7.9%) amid news of a continued and accelerating decline in US oil drilling. Hence, at the end of the day USDRUB closed at 69.47, i.e. RUB weakened 0.7%. Meanwhile, NOK and NGN strengthened 1.3% and 1.0%, respectively.
On the other hand, the EM FX index closed 0.8-1.2% in the red driven by BRL (-2.9%), MXN (-1.2%), TRY (-1.04%) and ZAR (-0.8%), as US 4Q14 GDP eased to 2.6% annualised, just below expectations of above 3.0%, and down from the 5.0% growth rate in the prior quarter. The latter was the sequential growth peak, in the view of our macroeconomists, in the current US economic cycle. In other words, it is all downhill from here. Real GDP ex inventories rose 1.8%. For all of 2014, US real GDP rose 2.4% (our forecast was 2.5%), but growth was just 2.2% in 2013. Having said that, consumer spending was quite robust, growing 4.3%. Lower oil prices are certainly helping and this is reflected in the multi-year highs in US consumer confidence. Real disposable income rose a strong 3.8%. Weakness is noticeable in non-residential fixed investment, which grew only 1.9%, compared with 8.9% in the quarter before. Overall, the GDP data is a mixed bag and continues to imply a dilemma facing the Fed.