Russia FX Beat - August 31, 2017

> Today's focus. PCE core deflator data as US data improves.
> Global trigger: US data impresses. The dollar gained yesterday, EUR/USD ducking below 1.19. Its appreciation is in part attributable to its undervaluation, but also to decent US economic data. Yesterday, a strong ADP employment report pointed toward a healthy official labor report tomorrow. In addition, 2Q GDP was revised higher to a 3% Q-o-Q annualized pace - its fastest since 1Q15.
Today sees another batch of important data. First, Eurozone CPI data for August comes out at 12:00 Moscow time. The risk is on the upside following better than expected German data yesterday. Yet, at 1.4-1.5% y-o-y, CPI has a long way to go to reach the 2% target. In the US, August personal spending/income and PCE deflator data is due at 15:30. Core PCE, the Fed's preferred measure of inflation, languished at just 1.4% y-o-y in July. An upside surprise would feed into the positive dollar momentum.
> Bottom line. We see the 1.1830-1.1850 area as important for EUR/USD. A break of this would suggest a deeper correction.
> Regional trigger: Good CPI result. Yesterday, Russian markets again strongly outperformed. In stocks, the MSCI Russia index gained 1.5%, compared with 0.6% for the broader MSCI EM index. The ruble was the top performing currency, managing to even make gains against the appreciating dollar.
Important to this was a surprise 0.2% w-o-w decline in Russian CPI, which brought the decline in the CPI since the start of August down to 0.4%. Although monthly data (due in one week) could differ from the weekly data, it looks like it will show a considerable y-o-y fall, perhaps to 3.5% y-o-y from 3.9% in July. This means that a 50 bp key rate cut, to 8.5%, at the next CBR meeting, on September 15, is becoming more likely. We will wait until next week's CPI and inflation expectations data before formalizing our view.
The ruble's outperformance has been driven by reasonable ruble demand from exporters and increasing buying by international investors. It is impressive that these flows have been sufficient to outweigh a better bid dollar and a fall in Brent prices to their lowest level in two weeks.
> Bottom line. For USD/RUB, the 58.30 area represents important support, near the recent low and the 100d moving average. We think it is cheap at its current level, but a tight stop is recommended in case of a sharp break lower.