ITI Capital: Buying USD/RUB with a 64 target in short term

Following the Federal Open Market Committee (FOMC) meeting that revealed that seven of the 17 policymakers are forecasting two rate cuts by the end of 2019 DXY fell 1.8%, RUB/USD advanced 2.3%, broadly in line with its emerging market peers. Now the rouble is trading at the levels seen in August 2018, before the sanctions against Turkey and Russia over Salisbury incident were imposed. RUB/USD recorded a 11.4% growth, twice as much as emerging market currencies.

  • We believe that the rouble is overbought, given current oil prices and geopolitical risks. According to our estimates, the justified rate at the current oil prices stands at 64.5 (50-day moving average). The current support level for the rouble is 62.35
  • There are several USD/RUB resistance levels, as the dollar climbs further: 62.99; 63.13; 63.5 and 63.9
  • With US FED rate cut in July already priced in, the dollar looks overbought
  • July and August will see steep rouble drops this year, according to our expectations
  • At the same time, there are quite a few positive factors that could help the rouble to offset its weakness

Short-term Negative local factors

  • The end of the tax period this month
  • Conversion into currency for dividend payments (July and August), the balance of 2018 payments amounts to $13 bln
  • The FX-buying for payments to foreign holders of Russian equities have just begun
  • Sberbank ($2.5 bln, July 4), Norilsk Nickel ($1.6 bln, July 12), Lukoil ($2.5 bln, July 30), Gazprom ($1.6 bln, August 9) are the leaders in terms of dividends payments.
  • MinFin interventions (around $5 bln a month) and low liquidity in the FX-market
  • Excess strengthening of the rouble could increase the amount of daily forex purchases on the domestic market suspended in recent years by MinFin and reduce the projected transactions timeline from the current 36 months to 24 and lower
  • Seasonal decrease in export FX-revenues and external debt payments

Short-term Negative global factors

  • A breakdown in U.S. — China trade talks at G-20 summit July 29-30
  • Escalating U.S.-Iran tensions, including a military strike, followed by a massive outflow of funds from emerging countries
  • MinFin interventions and low liquidity in the FX-market

Short-term supportive factors for rouble

  • Stronger demand for risky assets after US — China trade deal
  • Russia may start spending its National Wellbeing Fund on local infrastructure projects next year, as it estimated amount of FX-reserves including this year MinFIn FX-buying and last year suspended (from August 2018) is on track to reach 7% of GDP, the level at which the Finance Ministry may invest in domestic projects under current law. As a result, the Central Bank will sell FX-reserves to get roubles on the open market

Perfect scenario for the rouble

  • In early 2019 the risk premium was 15 roubles, now it is below 7 roubles, roughly 45% of the original size
  • On the performance side, the rouble is still lagging behind Russia's currency debt, which is trading at the early 2018 level, when USD/RUB was under 57
  • The rouble and OFZ usually track Russia’s FX-assets. The upside potential of long-term OFZ prices remains 2%, implying a 40 bps yields drop
  • Short-term OFZs (up to 4 years maturity) are more attractive as an investment target; the yields downside potential is 50-60 bps, which means that they may go back to March 2018 levels