Russia FX Beat - July 28, 2017

> Today's focus. CBR to hold rates at 9% and retain easing bias.
> Global trigger: Dollar respite. The dollar recovered a small portion of its recent losses yesterday as investors took a more considered view of this week's Fed decision. As we have highlighted, a EUR/USD above 1.17 is rather stretched.
We look for EUR/USD to hold below its 1.1780 high over the near term, with market pricing for a US rate hike before year end already very subdued. One risk to this view would be a disastrous US 2Q GDP report today (15:30 Moscow time). The consensus is for a sharp rebound to a 2.7% Q-o-Q annualized pace versus just 1.4% in 1Q.
In the Eurozone, sentiment data is due at 12:00 and German CPI at 15:00. The latter is forecast to stay at a depressed 1.4% y-o-y, far below the ECB's 2% inflation target.
> Bottom line. Bad 2Q GDP data could take EUR/USD toward 1.1750.
> Regional trigger: CBR and sanctions. The main event today is the CBR's key rate decision at 13:30. We expect rates to be kept unchanged at 9% (see "CBR Preview: Assume Nothing, Question Everything"). Despite reassuring w-o-w inflation data, we think the CBR will be cautious after the sharp pickup in June CPI to 4.4% y-o-y and a levelling off of the inflation expectations downtrend.
This week, talk of a potential 25 bps cut has regained some traction, in part due to the strengthening of the ruble and oil prices. We doubt the CBR will react to such short-term price movements, putting more emphasis on a need to see monthly CPI resume its disinflation trend. The CBR justified a 50 bps cut in April on better than forecast disinflation, and the reverse should hold true today in terms of the rise in June CPI.
Overnight, the US Senate passed a revised sanctions bill on Russia, Iran and North Korea by 98 votes to 2. With both houses having approved the bill, it now passes to the president. With Congress able to easily override any attempted Trump veto, it is hard to see the bill not becoming law. However, the timing of an official communication by Trump is not clear. Acceptance of the sanctions would weigh on the ruble.
> Bottom line. Profit taxes due today (R280 bln) may provide a modicum of support for the ruble. Should the CBR decide upon no change, USD/RUB would be left little altered, while a 25 bps cut could lead to an initial ruble rally in the region of 0.5%, before it settles back. The CBR should retain a view for easing in 2H, and we doubt today's statement will alter expectations for a total of around 75 bps of cuts.