Russia FX Beat - January 25, 2018

> Today's focus. ECB decision.
> Global trigger: Dollar falls on Mnuchin's comments. Broad dollar weakness resumed with new force yesterday, and the dollar lost an average of 1% against the main global currencies. The fall was triggered by comments by US Treasury Secretary Steven Mnuchin, who said a weaker dollar is good for trade and the US economy. This surprised markets, as it marked a departure from traditional US currency policy: for two decades, US treasury secretaries have always advocated a strong dollar to keep it as the world's main reserve currency. Dollar weakening undermines this status and thus outweighs any possible gains for the US economy via improved exporter competitiveness.
Yesterday morning the dollar was also pressured by upbeat eurozone PMI data, which surpassed expectations and hit a 10y high. It was mainly led by growth in the services sector, indicating confidence in the eurozone economy. The IMF projects GDP growth of 2.2% this year in the region.
The main event today is the ECB monetary policy meeting. The decision will be announced at 15:45 Moscow time, and President Draghi will hold a press conference at 16:30. Given the euro's recent surge (EUR/USD broke the 1.245 mark yesterday, not far from our 1.25 year end forecast), we expect very dovish comments and Draghi to talk down the euro.
> Bottom line. A dovish ECB could spur some profit taking and EUR/USD could revert to 1.23. But if Draghi doesn't talk down the euro, EUR/USD could break 1.25.
> Regional trigger: Ruble lagging EM on sanction caution. The ruble firmed 0.3% yesterday, while its main peers gained much more: ZAR was up 1.5%, TRY 0.8%, MXN 1% and BRL an extraordinary 3%, which was also driven by local political issues. We think the ruble's underperformance was caused by internationals being cautious ahead of the US Treasury sanction report, which is due by next Monday. However, yesterday saw healthy demand at OFZ auctions from nonresidents.
This morning the ruble is catching up and has strengthened by 0.6%. It is finding support from exporters that still need to sell FX to pay MET by today's deadline. The ruble is also being supported by oil, which broke $71/bbl amid ongoing crude inventory draws in the US and dollar weakness.
> Bottom line. Given oil is testing new highs, the tax payments and dollar weakness, we think USD/RUB could test 55.7.