Russia FX Beat - February 26, 2018

> Today's focus. S&P upgrades Russia to investment grade.
> Global trigger: Awaiting Powell. The S&P 500 ended last week on a positive note, adding 1.6% on Friday to close at its highest level since February 2. The risk-on mood continued today. The Asian markets rose, the dollar was under pressure against all currencies and EM sentiment was bullish.
This week's major focus is tomorrow, when new Fed Chairman Jerome Powell testifies. We will look very closely for any signs that the central bank is considering a faster pace of hikes. Today, ECB President Draghi speaks at 17:00 Moscow time.
> Bottom line. EUR/USD might drift toward 1.2350.
> Regional trigger: S&P upgrades Russia, MET deadline. On Friday, Fitch and S&P published scheduled rating reviews for Russia, the former affirming its foreign currency rating at BBB- with a positive outlook and the latter upgrading its rating one notch to BBB- with a stable outlook. Thus, Russia now has a second investment-grade rating (Moody's still has it rated lower).
S&P based its upgrade on routine arguments: prudent fiscal and monetary policy (which has allowed the economy to adapt to low oil prices and sanctions), measures taken by the CBR to support financial stability, low government debt and the current account surplus. Given the favorable oil price environment, as well as the absence of US sanctions on Russian sovereign debt, we thought the chances of an upgrade in 2018 had improved but believed it would come in the middle of the year.
Russia already had an investment-grade local currency rating (i.e. for OFZs), so the decision should not spark additional foreign inflows. However, it is generally positive for Russian assets.
> Bottom line. On S&P's upgrade and the positive risk backdrop, the ruble has gained 0.7% today, putting USD/RUB below 56. The ruble is also supported by the R480 bln in MET taxes due today. We expect USD/RUB to settle close to 55.8.