Russia FX Beat - December 18, 2017

> Today's focus. CBR cut fallout, South Africa vote.
> Global trigger: All about taxes. Global financial markets, having navigated safely through last week's major central bank decisions, are set to wind down this week as the holiday period nears.
The one important issue still to be settled is the hoped-for passing of US tax legislation by Congress before the end of this week. The rough plan seems to be for both the House and Senate to hold votes around the middle of the week, in order for President Trump to sign the bill into law by Christmas.
This looks likely to be achieved and would probably give the dollar a gentle boost. If it does not happen, the negative impact on the dollar would be larger.
Data-wise, the focus today is on the eurozone CPI reading for November (13:00 Moscow time), which should be confirmed at 1.5% y-o-y. In the US, this week's most important release will be the November PCE deflator on Friday.
> Bottom line. The passage of tax reform would help the DXY Index climb above 94 this week.
> Regional trigger: CBR shock. Analysts, ourselves included, were shocked by the CBR's decision on Friday to cut its key rate 50 bps to 7.75%.
Although the CBR retained a clearly hawkish or cautious bent, it justified its larger cut based on the recent OPEC+ decision to extend output cuts deep into 2018. The CBR argued that this had removed one important downside risk, allowing it to upgrade its Urals oil price forecast for next year to $55/bbl from $44/bbl.
Looking ahead, the CBR's forward guidance on the potential for further easing was arguably toughened. The regulator now sees the prospect of "some" cuts in 1H18. Previously, it saw "further" cuts at "upcoming meetings." For more, see "CBR Review - CBR Surprises with 50 bp Cut," published on Friday.
The market reaction was interesting. The ruble was almost unmoved by the decision. In contrast, the rates market was hit hard, with most curves steepening sharply. Short-dated OFZ yields shed 7+ bps. Markets seem convinced that the key rate will reach 6-7% quickly. We are not so sure.
> Bottom line. We expect USD/RUB to hold near 58.70-58.80. The EM focus is on South Africa. The rand is advancing sharply on the probable outcome of an ANC leadership race.