Russia FX Beat - July 12, 2017

> Today's focus. Yellen's semiannual monetary policy report to the House.
> Global trigger: Yellen's testimony and oil volatility. DXY lost almost 0.7% yesterday and the 10y US Treasury yield fell 4 bps as the political scandal surrounding the White House is gaining momentum. New allegations based on email exchanges reveal that Donald Trump Jr held meeting with a Russian government lawyer about potentially damaging information for Hillary Clinton's campaign.
Elsewhere, Fed Governor Lael Brainard expressed support for beginning to shrink the balance sheet "soon," though she was cautious over further interest rate hikes.
Today's focus is on Yellen's semiannual testimony on monetary policy to the House financial services committee (17:00 Moscow time) and tomorrow to the Senate banking committee.
The API report showed a large 8.13 mln bbl crude stock draw (versus the consensus forecast of 2.5 mln), which pushed Brent to an intraday high of $48.37/bbl. Should today's EIA report (17:30 Moscow time) confirm the stock draw, this would be another strong indication that the US market is rebalancing. However, the nature of any drawdown will be more important, whether there is a slump in domestic output to spur a strongly positive market reaction or an increase in exports that might extend the bearish trend.
> Bottom line. We see EUR/USD testing the 1.1467 resistance level.
> Regional trigger: Current account turned negative in 2Q. USD/RUB reached an intraday high of 61 yesterday. Flows were mixed, driven by EM risk-off and some FX buying related to Norilsk Nickel's dividends (we think Norilsk Nickel shareholders have completed the bulk of FX conversion). Some exporters and internationals were happy to buy the ruble at that level, pushing USD/RUB to 60.70.
According to preliminary estimates by CBR, the current account turned negative in 2Q17. The deficit reached $0.3 bln in the quarter, compared with a $23.3 bln surplus in 1Q17. The current account is traditionally weak in the summer and stemmed from a weaker trade surplus (export growth eased to 22.8% y-o-y while import growth rose to 28.5% y-o-y).
The current account deficit is likely to widen further in 3Q17 if import growth remains strong. In this case, the capital inflow needed to finance the deficit would increase in importance.
> Bottom line. If the EIA data proves supportive, a further rise in the oil price could push the ruble to 60.30 or below.