Russia FX Beat - August 1, 2017

> Today's focus. US inflation data to arrive as the dollar slumps.
> Global trigger: PCE inflation risk. The dollar fell again yesterday, wrapping up a miserable month. On a trade-weighted basis, the dollar has now declined for five straight months. From its peak in early January, the DXY Index has fallen by over 10%.
The dollar's sharp losses are a result of a re-pricing of US political and monetary policy risks. These two factors are interconnected: the Trump administration has so far failed to achieve the reforms that had been seen as drivers of stronger growth, inflation pressure and a faster pace of Fed tightening.
Today sees a raft of important US news, led by PCE deflators, spending and income data, all due at 15:30 Moscow time. The Fed's favored measure of inflation, the core PCE deflator, is expected to have remained unchanged at 1.4% y-o-y. A downside surprise would play into the weak dollar narrative and doubt over whether the Fed will hike rates again this year. The ISM manufacturing survey is due at 17:00. Prior to the US data, the Eurozone releases 2Q GDP at 12:00.
> Bottom line. EUR/USD risks overshooting to 1.1850+.
> Regional trigger: Major ruble underperformance. USD/RUB remained in a relatively stable range of 56 and 61 in 1H17. That the ruble is trading at the upper end of the range highlights it as a big underperformer against the beleaguered dollar. Put another way, the dollar depreciation trend became clear in early March, and since then, the ruble has been the worst performing major currency. It has fallen by almost 3% while almost every currency has gained, e.g. HUF +13%, EUR +12%, GBP +8%.
The poor performance becomes even clearer when compared with oil prices. Since they hit a YTD low in mid-June, prices have rallied 20% to close to $53/bbl. Over this period, the ruble managed to fall by over 2%. Put another way, the last time that the Brent price was at its current level was on May 25, when USD/RUB was trading at 56-57.
> Bottom line. Locally, Gazprom's sizeable R190 bln dividend is likely moving through markets ahead of the expected Thursday payment. We expect this flow to be negative for the ruble over the next two weeks. To make the payment, the company might sell around $0.8 bln, with investors subsequently buying an estimated $1.16 bln, as they convert the dividends into hard currency.