November Ruble/FX Flows. Global Risks Outweigh Ruble's Strong Fundamentals

Global risks outweigh the strong fundamentals for the ruble at this juncture.In October, the ruble firmed by 2.5%, which was one of the best results in the EM FX space. It even firmed to 69.2 against the dollar last week, its strongest level since June 2020. This came amid elevated exporter FX sales to pay taxes and dividends. This flow was one of the highest this year. The currency's strength also owed to the CBR's hefty 75 bp key rate hike to 7.5%. However, dollar demand emerged at these levels, most likely from both retail investors and importers, and probably also for dividend conversions. As a result, the ruble retreated to 71-72. Additional pressure came from rising geopolitical tensions due to the situation in Eastern Ukraine.Ahead of this week's FOMC meeting, global dollar strength has been playing against the ruble. Today, the Fed is likely to announce a cut to its QE program, as promised, and Fed Chairman Jerome Powell is likely to give a clear signal on a rate hike next year. Should this happen, we would expect the market to start pricing in larger and more active rate hikes over the next few years, which would cause the dollar to strengthen. We would expect EUR/USD to drop below 1.15.In these conditions, we think the ruble would be particularly vulnerable as the local markets will be closed for a public holiday on Thursday and will be illiquid on Friday; we think the currency could weaken to 73.However, after November 8, as long as geopolitical risks do not intensify, demand for the ruble should gradually increase, including exporter demand, as levels around 72 and above look attractive for selling USD/RUB.Of course, although the payments due to be made by exporters in November are less than in October - which we estimated at $25.6 bln - they are still very high at around $21 bln. Even adjusted for higher impending FX purchases under the budget rule, which will increase in November by R200 bln m-o-m to around R520 bln, or $7.3 bln, in terms of flows November could be one of the best months for the ruble this year. Meanwhile, the currency's fundamentals remain very strong. Natural gas prices are still very high, while oil prices may derive support from the upcoming decision of OPEC+, which could stick to its planned 0.4 mln bpd output hike and not heed calls for a more decisive increase. Moreover, amid elevated inflation the CBR appears set to continue hiking the key rate actively - potentially by 100 bps in December. We therefore expect the ruble to stage a gradual recovery in November, and we maintain our year-end forecast of 70.