Russia FX Beat - January 24, 2018

> Today's focus. EU PMI data to support euro bulls.
> Global trigger: Euro rallies on strong data. The dollar was trading in a tight range against major currencies for most of yesterday's session but began to weaken in the evening to hit fresh 3y lows. The main trigger was eurozone consumer confidence data released at 18:00, which came in well above expectations and indicated strong momentum in the region's economy. This extended the euro rally that started earlier this year amid rising optimism that the strengthening economy will prompt the ECB to start tightening monetary policy sooner. However, we think this is unlikely to influence the ECB's decision or forward guidance at Thursday's meeting. Should we see further signs of decent economic growth, the ECB could rethink at its March meeting, in our view.
The dollar was also hurt by concerns over US trade policy: yesterday, President Trump signed an executive order imposing steep import tariffs on solar panels and washing machines. The move was condemned by China and South Korea, two main exporters of these items. The market fears that this could be the start of wider US protectionism or even spark a trade war.
> Bottom line. A higher than expected eurozone PMI today could causes EUR/USD to head to 1.24.
> Regional trigger: Ruble stable amid EM weakness. EM currencies witnessed a selloff yesterday afternoon as a result of profit taking following news of the US imposing trade tariffs. Latin American currencies were hurt the most: the Brazilian real and Argentine peso lost more than 1%. Against this backdrop, the ruble was relatively stable, supported by high FX offers from exporters. In the evening, it managed to appreciate amid global dollar weakness and with oil breaking above $70/bbl.
The State Statistics Service yesterday reported that industrial output fell 1.5% y-o-y in December, following a 3.6% drop in November, meaning that it declined 1.7% y-o-y over 4Q17. This shows that economic growth remains sluggish, which could encourage the CBR to cut the key rate on February 9, especially giving the ongoing slowdown in y-o-y inflation, which is now running at 2.3%, well below the 4% target.
> Bottom line. The dollar continues to weaken today, while oil has stabilized just below $70/bbl. Exporters still need to sell more hard currency ahead of tax payments, so we think USD/RUB has a good potential chance of settling near 56.2.