Russia FX Beat - February 1, 2018

> Today's focus. US rates unchanged, CBR rate cut very likely.
> Global trigger: No change. As fully expected, the Fed held rates at 1.50% last night, in what was outgoing Chair Yellen's final meeting in charge. The FOMC statement to the decision was slightly more upbeat on growth and inflation, cementing market expectations that the US will hike rates by 25 bps to 1.75% on March 21. Global markets have been little moved by the decision, with the dollar gaining only slight support. For more, see our review, "No Change as Yellen Signs Off."
The US rate decision brought to a close what has been a torrid month for the dollar. The DXY fell 3.3% in January, its biggest monthly loss since March 2016 and worst January since 1987. In contrast, the S&P 500 rose 5.6%, its best monthly performance since late 2015.
Coming out ahead of tomorrow's US jobs data, yesterday's ADP report showed an encouraging 234,000 rise in private payrolls. We should get a fuller picture today from Challenger job cut (15:30 Moscow time) and ISM manufacturing (18:00) data. Elsewhere, ECB head economist Peter Praet speaks at 14:15.
> Bottom line. We expect the dollar to drift higher, potentially toward a test of 1.2350 versus the euro.
> Regional trigger: Inflation slowdown makes CBR cut seem inevitable. Yesterday, the ruble made moderate gains of 0.3% against the dollar, helped by a globally benign backdrop. Aside from the Brazilian real, EM FX peers gained 0.7-1.0%, which makes the ruble's performance look rather weak. There was strong local demand for dollars below the 56.2 level.
Foreigners continue to actively trade OFZ, in the absence of the US "debt report." Yields fell 3-9 bps across the curve, falling for a second consecutive day, while demand at Finance Ministry auctions was quite high.
Prices were flat in the week ending January 29. Inflation over the first 29 days of January amounted to only 0.3%, well below the 0.6% m-o-m a year ago. So, the y-o-y CPI should have continued declining and may now be close to 2.2%. Weaker than usual fruit and vegetable price growth, a moderate transport tariff hike and a slower rise in gas prices are the main reasons behind the potential CPI slowdown so far this year. Taking into account continuing disinflation, the strong ruble and Russia's weak economic performance in late 2017, we see the likelihood of the CBR's cutting the key rate by 25 bps at its February 9 meeting as high.
> Bottom line. The ruble is quite balanced. We think USD/RUB will stay near 56.2 if the global backdrop stays calm.