Russia FX Beat - August 17, 2017

> Today's focus. Fed hints at rising concern over low inflation.
> Global trigger: Fed upsets dollar. Summer is upon us, and global markets lack direction. After spiking last week on concern regarding North Korea, the VIX volatility index is now back near its historic low. In the US, attention has swung toward domestic issues, e.g. the violent clashes in Charlottesville, which financial markets are less interested in.
EUR/USD yesterday tested support at 1.17 for the second straight day following reports that ECB President Draghi would not deliver a major new message in a keynote speech next Friday.
Yet by the end of the trading session, dollar weakness reasserted itself, after the release of the minutes to the July 25-26 Fed meeting. The tone was rather dovish, with members citing the risk of inflation staying below target for longer than expected.
Today Fed voter Robert Kaplan speaks at 20:00 Moscow time. Prior to this, the US sees industrial production at 16:15 and the ECB releases minutes to its July 20 meeting at 14:30.
> Bottom line. The DXY might test support at 93.15-93.20.
> Regional trigger: Disinflation. The ruble outperformed the dollar yesterday, helped along by both foreign and exporter flows. This has taken USD/RUB lower to a test of important support in the 59.35-59.40 area - where the 50d and 200d moving averages lie. A close today beneath this would open the way to a potential move toward 59.
Weekly Russian CPI data showed a third consecutive 0.1% w-o-w decline driven by a fall in fruit and vegetable prices (down 3.8%). An m-o-m fall in August seems likely and could push the y-o-y rate even lower than July's 3.9% reading. Key to whether the CBR cuts rates by 25 or 50 bps on September 15 might be new inflation expectations data due at the start of the month.
Yesterday the CBR released July banking sector data that showed FX liquidity contracting for the second month in a row. According to our estimates, short-term FX liquidity dropped by $0.8 bln to $102.5 bln, extending the YTD decline to almost $10 bln. Hence, short-term FX liquidity remains in excess, but only to the tune of around $2-3 bln.
> Bottom line. Near-term ruble gains are likely if USD/RUB can decisively break below support near 59.35-59.40.