Russia FX Beat - August 11, 2017

> Today's focus. July CPI figures from the US.
> Global trigger: Geopolitical tensions continue to rise. Profit-taking has continued in global markets. Since the beginning of the week, the S&P 500 has lost over 1.5% and EUR/USD has dipped 1%. Demand for safe-haven assets continues to increase, with the US 10y yield down 7 bps so far this week, while gold is up 2.6%, approaching resistance at $1,293/oz.
The key driver has been the escalating rhetoric between the US and North Korea regarding possible military strikes. Yesterday the situation grew even tenser after Donald Trump promised a major response to any strike against the US or its allies.
As for central bank commentary, yesterday NY Fed head Bill Dudley struck the same tone as his counterparts earlier this week, cautioning that "it's going to take some time" for inflation to reach the Fed's 2% target despite the moderately positive outlook for the US economy.
Today the market will be keeping an eye out for the July CPI data due from the US at 15:30 Moscow time. The market expects headline readings of 0.2% m-o-m and 1.8% y-o-y. If inflation comes in below expectations, which are not high to begin with, we could see further pressure on the dollar and a further drop in the likelihood of another rate hike this year; market pricing currently suggests a 39% chance of a hike in December.
> Bottom line. Low US CPI reading could push EUR/USD to 1.1790.
> Regional trigger: Local bid and weak oil to weigh on ruble. USD/RUB volumes on MOEX remained close to average at $4.2 bln yesterday as the ruble traded in a narrow 30-kopek range.
The correlation between the ruble and oil has fallen again, this time to the benefit of the ruble. Even though Brent has dropped around 2% so far this month, the local currency has gained 0.3% against the dollar. This puts the ruble among the top performers relative to the dollar in a period that has seen profit-taking in EM currencies, including the BRL (-1.5%) and ZAR (-1.45%).
Support for the ruble has come from internationals selling at a USD/RUB rate of 59.90 and higher to take profit on their long-dollar positions. However, the local bid, which is driven by demand for dollar liquidity, continues to drag on the ruble and may be around for some time to come.
> Bottom line. We expect the ruble to weaken today, targeting 60.32, but this could be offset by internationals selling FX.