2022 FX & Liquidity Preview - Strong Fundamentals to Back Ruble and FX Liquidity

Although 2021 saw gains for the dollar globally, the ruble also fared well, and we expect these trends to continue next year. Meanwhile, we see the ruble liquidity surplus in the Russian banking system shrinking and even going into deficit, while FX liquidity, like the ruble, should be boosted by high gas prices. > Global FX. Amid elevated US inflation, we expect the Fed to end QE in 1Q22 while signaling rate hikes, albeit cautiously due to the new coronavirus wave in the US. Starting in 2Q22, when the pandemic situation should improve, we expect rate hikes of 25 bps per quarter until 2024, which should push the 10y UST yield above 2% next year and strengthen the greenback to 1.07 against the euro.> Ruble. Following the recent Putin-Biden call, we expect geopolitical risks to subside, while the higher key rate will also back the ruble. Overall, in the event of a geopolitical escalation, we would expect the CBR to step in and limit ruble volatility. In our base case, thanks to the very high gas prices, we expect the ruble to strengthen to 67 and 72 against the dollar and the euro, respectively, next year.> Ruble liquidity. Ruble liquidity shifted back to a structural surplus this year thanks to budget inflows. However, the pandemic-related rise of cash in circulation has not been unwound. Next year, liquidity inflows will fade, but outflows will remain, so we expect the liquidity surplus to shrink to almost zero, which should push O/N rates closer to the key rate.> FX liquidity. This year, FX liquidity was stable, as inflows were neutralized by carry trade operations. We expect stronger inflows in 2022 thanks to high gas prices and lower FX purchases under the fiscal rule (due to the investment of NWF funds). Thus, we think that next year the O/N basis will be consistently positive at around 10-20 bps and longer-term USD/RUB basis swaps tighter by 50-100 bps.