Russia FX Beat - January 29, 2018

> Today's focus. US reports on new Russia sanctions.
> Global trigger: US inflation update. Last week was a rough one for the dollar, which fell over 1.5%, as measured by the DXY, its sixth consecutive weekly decline.
If the dollar's losses last week were driven by suspicions that the Trump administration prefers a weaker dollar, its performance this week will be driven by important economic data releases.
Today sees spending and inflation data for December (16:30). The 4Q GDP data released Friday, which showed growth of 2.6%, was a little disappointing. Today's PCE core deflator is expected to have stayed at a subdued 1.5% y-o-y. Later in the week, we will get the ISM indexes (Thursday) and a jobs report (Friday).
There are two events to which we will be paying special attention this week. Tomorrow, President Trump will give his State of the Union address, mapping out his agenda for 2018, ahead of the midterm elections in November. Then, on Wednesday, Janet Yellen will preside over her final meeting as Fed chair. Rates are fully expected to be held at 1.50%, so we will be looking at whether the tone of the FOMC statement turns more hawkish.
> Bottom line. The dollar should be stable ahead of Trump's speech and the Fed decision. But it is still biased lower.
> Regional trigger: Sanctions, profit taxes, FX liquidity improving. Early in the day on Friday, the ruble was trading flat in a narrow range but quickly slipped 0.6% on news that new US sanctions had been enacted. They were not related to the US sanctions report due today; instead, a few additional individuals and companies were added to existing Ukraine-related financial sanctions. Still, the market's reaction was rather profound, as it is cautious ahead of the sanctions reports that will probably be released tonight. If no significant restrictions are recommended, the ruble will moderately firm. If they are, it may significantly depreciate. In any case, it will get some support this morning and afternoon, as companies have to pay profit taxes today. Though receipts are much lower than those from MET, we expect FX offers from exporters to be elevated, as they also need rubles to cover operational costs at month end.
FX liquidity, it seems, has finally returned to normal. On Friday, banks borrowed an extraordinary R334.7 bln from the CBR in the form of O/N FX swaps, placing $6 bln. This shows that banks have some free FX funds. In addition, according to banking statistics, VTB seems to have provided financing for CEFC's purchase of a stake in Rosneft in December, so since this has already happened, there are no threats to FX liquidity in the near future.
> Bottom line. USD/RUB may hover near 56.3 ahead of the US sanction reports.