Russia FX Beat - July 27, 2017

> Today's focus. Deciphering whether the Fed has turned dovish.
> Global trigger: The difference one word can make. To no one's surprise, the Fed held interest rates at 1.25% last night (see our review, "No Change, Low Inflation Noted"). The statement to the decision contained two meaningful changes.
First, the Fed noted that inflation was "running below 2%," compared with its June statement, which said it was "running somewhat below 2%." The removal of one word may seem minor, but, given investors' focus on the inflation outlook, the Fed had to have known that this change would get attention. The market, which had doubted the Fed would raise rates again before year end, scaled back pricing even more in response.
The other alteration concerned the start of the Fed's balance sheet reduction. It is now likely to commence "relatively soon," which suggests an announcement at the next Fed meeting, on September 20. The smart money looks to be on a third and final 25 bp hike in 2017 to come in December.
> Bottom line. The initial reaction to the decision makes clear that this is a market that needs no excuse to push the dollar weaker. Yet, we think the recent rapid fall in USD/G10 FX has gone far enough for the time being. There may be little technical resistance to a EUR/USD move toward 1.20, but we think the ECB will indicate its dissatisfaction before long.
> Regional trigger: Temporary reprieve. The Fed decision is likely to be a boon to broad risk sentiment, at least in the short term. The ruble participated in this overnight, strengthening to as far as 59.36. But we believe it will be a laggard in any EM FX rally and that USD/RUB below 59.50 offers good value, with a target for a move back above 60 soon.
Yesterday's weekly CPI data showed flat w-o-w price growth. It confirmed that food prices were falling (fruit and vegetable prices fell 2.2% w-o-w versus 1.7% the week prior). This supports the view that the rise in inflation was temporary. Nonetheless, we think the CBR will keep its key rate at 9% tomorrow, preferring to wait for confirmation of the disinflationary trend in forthcoming monthly CPI and inflation expectations data.
> Bottom line. Ruble appreciation has been driven by a rally in the Brent price to $51/bbl and reaction to the Fed decision. Corporate demand for the ruble on the back of dividend and tax payments has, in fact, underwhelmed this week. We think the ruble's underperformance will return in coming days.