Russia FX Beat - February 5, 2018

> Today's focus. S&P 500 falls 2.1%, CBR to cut 25 bps on Friday.
> Global trigger: Equity market selloff. US equity markets moved sharply lower on Friday, a trend that fed through into today's trading in Asia. The S&P 500 ended the day down 2.1%, posting its first 2%+ loss since September 2016.
The catalyst for the equity market selloff looks to have been concern over the prospect of US rate tightening in combination with a sense that the lengthy stock market rally was due for an interruption.
Debate over faster US rate increases was brought about by Friday's strong labor report and particularly a jump in average earnings growth to 2.9% y-o-y from an upwardly revised 2.7%.
With Jay Powell assuming the chair of the Fed, the focus this week will remain on US rates and whether the UST 10y can hit 3%. Today, the US sees the ISM non-manufacturing index at 18:00 Moscow time, while ECB President Draghi speaks at 19:00 to the European Parliament.
> Bottom line. Important is whether Friday's equity selloff swells into something more serious. That said, EUR/USD is a relative bystander and could hold near 1.2450.
> Regional trigger: Ruble weaker on EM FX selloff despite relief from US OFZ report. Friday's US jobs data sparked a broad selloff in risk assets, with EM FX losing around 0.5%. The ruble tried to resist, but ultimately followed the trend. It gained about 20 kopeks after the US "debt report" was published on Bloomberg. The report showed little appetite to impose sanctions on OFZ ownership given the assessment that it would harm US investors and businesses. Against this backdrop, the OFZ curve tightened by some 3 bps. Yet relief on this front was not sufficient to withstand the global risk-off mood, and by late Friday, the ruble caught up with peers, falling 1% on the day.
Today at 12:00, the Finance Ministry will announce the volume of FX interventions for the period of February 7 to March 6. We expect to see a new high of R293 bln ($5.2 bln), versus January's R257 bln ($4.5 bln). However, in terms of daily volumes, the increase will be milder ($276 mln, versus $265 mln) due to the calendar factor. We do not expect a major reaction.
This week's main event in Russia will be Friday's CBR decision. Continued low inflation and comments from Nabiullina suggest a key rate cut is likely. We expect a 25 bp reduction to 7.50%.
> Bottom line. USD/RUB is likely to stay near 56.6 if the dollar remains firm.