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RUB: 56.0 passed, what next?


On Friday, trading activity and flows were subdued as the US market were closed for Independence Day. The MICEX reported total turnover of just USD 2.9bn in USDRUB. Meanwhile, all eyes were on the Greek referendum that took place on Sunday, so it is unsurprising that investors were generally cutting down on risk positions. In light of this, the EM FX index slipped 0.3-0.5%, with ZAR down 0.6% and TRY closing 0.2% in the red, while BRL dipped 1.2% and MXN declined 0.5%. The performance of commodity-based currencies was weak as well: NOK lost 0.3% against USD and AUD ended 1.4% lower.

Brent traded heavily: CO1 closed 2.8% in the red at USD 60.3/bbl. To recap, last week EIA US crude stocks were up 2.4 million barrels, in line with API stocks and breaking the trend of eight consecutive declines. At 465.4 million barrels, US stocks remain more than 20% above their five-year range. On Friday, the US rig count increased for the first time after many weeks of constant declines, which stoked oversupply fears. Crude prices remain locked in a battle between strong demand on the one hand, and a sustained market surplus with rising production and record high stocks on the other, and we remain of the view that ultimately the surplus is likely to be more dominant, resulting in downward price pressure.

Against this, RUB weakened 0.8% to 55.97 against US, having scratched at 56.0 in the evening. As we have argued before, our thinking is that increasing capital outflow is to shape the balance on the Russian exchange market in the near term. However, if Brent slips below USD 60/bbl, it could produce additional pressure on RUB as we think the market's recent performance assumes a medium-term crude price range of USD 60-65/bbl.

Finally, Greece voted a conclusive ‘No’ yesterday. The Greek government has said that the referendum was not an in/out vote on monetary union. EU Leaders will now have to tread carefully as the Greek result could have unintended consequences of creating wider political contagion and therefore undermine the viability of monetary union. As a result, a Grexit is not automatic or assured. The ECB meets today to review its assistance to the Greek banks and it would be cataclysmic for the Greek banking system if the ECB pulled the plug. More likely, a decision will be deferred until EU leaders, who hold a summit tomorrow, make a decision.

The next hurdle for the Greek government is the EUR 3.5bn payment to the ECB on 20 July. The Greek government’s cash position is tight so it is unlikely they will be able to meet it. Now that the second bail-out programme has expired, any negotiations over further assistance will have to start from square one (though this might not be as difficult as it seems).

The market reaction to the Greek referendum has seen sizeable losses in the Asian equity markets (Nikkei off 2.25%, Hang Seng off 4.21% though the Shanghai Composite is up 0.5% with the weekend announcement on brokerages supporting the market). European equity markets are likely to be in the red at the open. In FX, EURUSD is holding up well at 1.1066 and USDJPY is at 122.48. Not much sign of safe-haven flows taking place, with many market participants thinking the Greek situation delays Fed tightening, so the US dollar does not yet have a trigger for a sizeable upward move.

Maxim Korovin, Tatina Zueva
VTB Capital analysts

ruble, EU, oil, FX market

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