Russia FX Beat - February 8, 2018

> Today's focus. US spending deal close as shutdown looms.
> Global trigger: US budget deal close. US equity markets continued to calm yesterday, with the S&P 500 ending the day down 0.5%. After trading in positive territory for much of the day, the index sank 1% in the last 20 minutes of trade. It closed 7% below its January 26 peak.
Policymakers remain unfussed by the recent market turmoil. Yesterday, one Fed official said that volatility "can be healthy," while another said that the market moves to date are not an issue for central bankers. Today, many Fed and ECB officials are due to speak. This morning, BoJ Governor Kuroda said that Japan still required "tenacious monetary easing." In the UK, the BoE looks set to leave its policy rate unchanged at 0.50% (15:00 Moscow time).
Overnight, the US Senate agreed on a bipartisan budget deal for the next two years. The dollar and UST yields reacted positively. The legislation, if passed, would prevent a government shutdown but result in a fiscal deficit in excess of $1 trln next year. The Senate and House are expected to vote on the deal today.
> Bottom line. The dollar appreciated strongly yesterday, with the DXY index breaking back above 90. Against the euro, the dollar may struggle to advance beyond 1.2250.
> Regional trigger: Ruble weakness resumes; exporters could step in. Yesterday, for the second time this week, the ruble lost more than 1.2%. The move was in line with general EM FX weakness and exacerbated by a fall in oil after the EIA reported a rise in US crude inventories (the API reported a draw on Tuesday) and a surge in US output to 10.25 mln bpd. The EIA also lifted its year-end output forecast to more than 10.25 mln bpd. Against this backdrop, Brent lost about 2% yesterday.
Despite the falling ruble, demand at yesterday's OFZ auctions was quite high, with a bid-to-cover ratio of 4.7 for the R20 bln in 10y OFZs and 2.7 for the R15 bln of 4y paper. We suspect that the demand was mainly from a single local player, who may have sold some of the paper in the secondary market, perhaps to nonresidents. The OFZ curve tightened by 7-10 bps yesterday and has tightened almost 35 bps YTD, while the ruble is nearly flat. As for inflation, it hit a record low of just 2.2% y-o-y at end January, which is also supportive for OFZs.
> Bottom line. USD/RUB is again well above the CBR fixing, at 57.6. Today's spread is 65 kopeks. Exporters may step up their FX selling, driving USD/RUB to 57.4.