Russia FX Beat - August 2, 2017

> Today's focus. USD/RUB set to close above 60 for second day in a row.
> Global trigger: ADP data. The dollar steadied yesterday, but the way that the market is currently trading, EUR/USD may yet test 1.20 before the current momentum subsides.
However, fundamentally we do not see reasons for EUR/USD to rally from current levels and argue for a pullback. First, market pricing for Fed tightening is very benign, with a hike by year end less than 40% priced and markets seeing only 30 bps of tightening until end 2018. Hence, we argue that the balance of risks is toward a re-pricing toward sharper tightening.
Second, despite better economic news out of the Eurozone, the EZ-US 2y sovereign yield spread is stuck near 200 bps. This is exactly where it was at the start of the year, while EUR/USD is up 12% over the same period. Hence, rate differentials do not justify EUR/USD's current elevated level.
Third, bullish EUR/USD positioning is stretched. CFTC data as of a week ago shows net long speculative euro positioning of 91,000 contracts. This is close to previous historical highs from 2007, 2011 and 2013.
Fourth and finally, we doubt the ECB will tolerate a stronger euro, given the fragility of the economy and inflation being well below target. If EUR/USD continues higher, a verbal intervention of some kind from the ECB is likely. For these reasons we retain a view for EUR/USD to pull back toward 1.15 in 3Q.
> Bottom line. Today's US data highlight is ADP employment at 15:30 Moscow time. Comments from Fed speakers are also due later in the session. EUR/USD to stay near 1.18.
> Regional trigger: Ruble breaks free of 60. Economy Minister Oreshkin commented yesterday that the ruble should remain "roughly" where it is. Rather than interpret that as a forecast, we view it as a validation that the recent ruble decline has taken it close to its fair value and that there need not be a further sharp push lower. We recall Oreshkin's mid-February remarks when he suggested that the ruble would be "weaker" before too long. At the time USD/RUB was near to 57.
Attention today will be on weekly CPI data (16:00) for more evidence of declining food prices and also on US EIA oil inventory data (17:30). The API data showed a 1.8 mln barrel build.
> Bottom line. USD/RUB targets a close above the June 21 high of 60.43, while 60.50 is the next major target.