Russia FX Beat - August 29, 2017

> Today's focus. Risk-off sentiment returns.
> Global trigger: New rise in geopolitical tensions. USD/JPY tested an intraday low of 108.34, a level last seen on April 17, and the US 10y yield broke through support at 2.13%, the lowest since June 26, after North Korea fired a ballistic missile over Japan earlier today, reigniting geopolitical tensions on the Korean Peninsula. Gold breached resistance at $1,315/oz, the 76.4% retracement level.
Japanese Prime Minister Shinzo Abe and US President Donald Trump agreed to increase the pressure on North Korea and called upon China and Russia to take action as well, though the White House has not officially commented on the issue.
Aside from the geopolitical tension, heavy rainfall continues in the wake of Tropical Storm Harvey, which is moving eastward and remains strong. The rainfall is expected to continue through the end of the week and could result in more extensive flooding and even tornadoes. Given the threat of further flooding, oil prices could come under pressure if more refining capacity comes offline. The drop in demand from US refiners has offset the effect of the recent supply disruptions in Libya, where output was until just recently running at close to 1 mln bpd, almost four times the year-ago level.
August consumer confidence data is due from the US today.
> Bottom line. On the back of dollar weakness, EUR/USD breached resistance at 1.2014 and is headed toward 1.2050.
> Regional trigger: End of tax period. Yesterday exporters' FX selling finally picked up on the back of August's last tax payment (profit tax). Meanwhile, Brent hovered above $52.50/bbl.
With August taxes now behind us, exporter FX sales should ease, while internationals may start to take profit amid the rise in tensions and return of risk-off sentiment. This could send USD/RUB back to 58.70 or higher. The ruble usually struggles in early September as the peak of external debt redemptions approaches. We estimate 4Q17 redemptions at $17.2 bln.
We recommend staying long USD/RUB at the current levels, as the ruble looks overvalued. The key technical levels to watch are 58.70 and 58.90.
> Bottom line. USD/RUB to test resistance at 58.70.