Russia FX Beat - February 6, 2018

> Today's focus. Whether US equity slump halts or intensifies.
> Global trigger: Equity slump. Friday's 2% US equity market correction yesterday turned into a rout, with the S&P 500 shedding 4.1%. This was the index's biggest single-day decline since August 2011 and wiped out all the year-to-date gains. (So much for the positive start to the year.) US losses have bled into Asian markets, with the Nikkei 225 down close to 5%.
There is no single reason to justify the scale of the selloff. Clearly the surprise rise in US wages reported on Friday is a factor, feeding thoughts of faster-than-anticipated US hikes. There had also been a sense of complacency in the march higher in asset valuations, which chanced the possibility of a larger correction. Furthermore, given the stellar start to the year, asset managers would have struggled to explain to their investors why year-to-date profits had been wiped out, and this mindset probably accelerated the selloff.
Once-rising UST yields - also cited previously as a source of concern - have moved sharply lower. Indeed, growing US fiscal deficits and a potential government shutdown have also fed anxiety lately.
> Bottom line. Markets will watch to see if new Fed Chair Powell has anything to say on the market moves. All eyes will be on US equities today, for which futures currently point toward a small decline at the US open. EUR/USD is a relative bystander and could hold near 1.24.
> Regional trigger: Exporters might insulate the ruble. Yesterday, the ruble lost 1.2%, slightly underperforming EM FX peers. This happened against broad risk-off sentiment, which we described above.
Additionally, the ruble was pressured by a falling oil price, which lost about 2% and settled below $67/bbl. The move was sparked not only by a firming dollar, but also by expectations that US oil inventories will rise for the second straight week, this time by 3 mln bbl. API data will be released tonight.
This morning's USD/RUB level of 57.2 significantly exceeds today's CBR fixing of 56.6. This may prompt Russian exporters to increase their FX selling, particularly as this month they are due to pay a record-high R480 bln in MET taxes. So, today, the ruble has a good chance to pare its losses.
> Bottom line. If risk sentiment calms today, the ruble could erase some of its losses. We would not rule out USD/RUB falling below 57, but this depends on the US mood.