Russia FX Beat - August 22, 2017

> Today's focus. North Korea threatens "merciless revenge."
> Global trigger: North Korea threat. Although yesterday was absent major news flow, the dollar found itself back under pressure amid low turnover. Ahead of important speeches tomorrow and on Friday from ECB President Draghi, EUR/USD rose back above 1.18. A well-supported euro underlines why Draghi is set to avoid announcing anything new regarding QE tapering. If, against our expectation, Draghi is hawkish, we would expect EUR/USD to climb above 1.20 in short order.
Today's schedule is again quiet. The US does not have any major economic events on the agenda, while in the Eurozone, Germany releases the ZEW Survey at 12:00 Moscow time.
Overnight, and in response to joint US-South Korea military exercises, North Korea stated that the US faces "merciless revenge." After a recent lull in US-North Korea military rhetoric, this may yet return as a source of market anxiety.
> Bottom line. Sell EUR/USD at 1.18 prior to Draghi's speech.
> Regional trigger: USD/RUB stuck at 59. For the third straight day yesterday, USD/RUB traded down to 59 (or below) but failed to close decisively beneath this key level. However, with a little over R500 bln of taxes to be paid on Friday, net exporter flows should be supportive overall for the ruble this week.
Ruble volatility has also trended lower (both implied and realized) since mid-July, resulting in an increase in the ruble's risk-adjusted return. For much of the last month, ruble outflows owing to the dividend season weighed on the currency, but with this out of the way the ruble can now benefit.
Offsetting this is lingering concern regarding certain developments in the local banking system. We expect FX liquidity to continue to deteriorate as we head toward 4Q, while the local banking sector has come under extra scrutiny. Yesterday Rosneft, Trafigura and UCP confirmed the completion of the $12.9 bln purchase of India's Essar Oil.
Elsewhere, Brent prices are quite volatile, albeit confined to a recent $50-53/bbl range. US crude inventories have fallen 70 mln bbl since peaking in March, while over the same period production has climbed by 0.3 mln bpd. API data is due tonight.
> Bottom line. We expect USD/RUB to push below 59.