Russia FX Beat - January 31, 2018

> Today's focus. US rates to be held at 1.5%. US oil inventories.
> Global trigger: No change from the Fed. The dollar was mixed yesterday as the broader risk environment soured. Equities fell across the board, with the S&P 500 down by over 1% for the first time since August. The VIX volatility index also leapt to its highest level since that time.
The ongoing rise in UST yields is taking a toll on sentiment. The shape of the curve is quite stable (i.e. the 2-10y spread is steady above 50 bps), but the entire curve is shifting higher - by close to 20 bps over the last two weeks. This rise in borrowing costs is threatening an end to the "goldilocks" mood enjoyed by US markets so far this year.
Today, will we watch for Eurozone CPI due at 13:00 Moscow time. Soft German CPI yesterday suggests that CPI region-wide might fall to 1.2% y-o-y, which would be its lowest in a year. In the, US ADP employment is due at 16:15, while the Fed rate decision comes at 22:00. US rates will be held at 1.50%, with the FOMC's statement set to be little changed. On Friday, Janet Yellen steps down as Fed chair to be replaced by Jay Powell.
> Bottom line. We expect range-trading into the Fed decision. If the statement is little changed, a fresh dollar decline could ensue.
> Regional trigger: Lack of proposal for OFZ sanctions helps ruble stay firm despite risk-off, falling oil. Yesterday, it became evident that at least for now no OFZ sanctions would be recommended to US Congress. This partially alleviated uncertainty. Internationals subsequently actively bought OFZs, causing the long end of the curve to tighten by 10 bps. Against this backdrop, the ruble firmed by 0.7% in the afternoon, USD/RUB breaking below 56. However, this seems to be a strong support level, at which good FX demand from corporates is seen.
Later in the day, a risk-off mood crept into global market, as UST 10y yields gained a foothold above 2.7%. As a result of this and the falling oil price, the ruble gave back its previous gains. Still, by the end of the day, it managed to again outperform its peers, losing only 0.1% versus an average of 0.5% for other EMs. It closed at around 56.4, which seems to be a good resistance level for now as FX offers from internationals come.
Overnight API data showed a higher than expected buildup of US oil inventories, pushing Brent below $69/bbl. EIA data is due today at 18:30. The oil move plays against the ruble, although the latter is still finding support from continuing dollar weakness.
> Bottom line. We expect USD/RUB to hover near the level of 56.3, as flows are pretty balanced.