Russia FX Beat - July 31, 2017

> Today's focus. Sanctions fallout as CBR keeps key rate at 9%.
> Global trigger: Slow start to busy week. July has been rough for the dollar. The DXY index is down over 2% this month, driven by a near 3% rise in EUR/USD. The top performers are the BRL (+5.6%), NOK (+5.5%) and CAD (+4%).
The deteriorating dollar backdrop is driven by several factors. Six months ago, it was thought that the greenback would benefit from both monetary policy and political divergence, especially in relation to the Eurozone. Instead, the reverse has played out, weighing on the dollar.
The week ahead offers several important data points for the US. As always, Friday's jobs report demands attention. Prior to this, we think tomorrow's June PCE inflation data is very important to the near-term Fed outlook. ISM manufacturing data is also due tomorrow. By contrast, today is quiet, with the focus on the Eurozone's July CPI report at 12:00 Moscow time.
> Bottom line. DXY to hold near 93.50 today.
> Regional trigger: Sanctions and the CBR. On Friday the CBR held its key rate unchanged at 9%. Its statement was balanced and showed that the decision was based upon a stalling of the disinflation process. Overall, the CBR did not appear unduly concerned, describing the recent pickup in inflation as "temporary."
If upcoming data confirms this, we would expect the CBR to resume cuts at its meeting on September 15, with a USD/RUB above 60 not a significant impediment. Crucially, prior to this decision, the CBR will be in possession of two more monthly CPI and inflation expectations reports. For more, please see "CBR Review: No Change, September Cut Alive," published on Friday.
This week sees heavy dividend payments of around R342 bln, led by the likes of Gazprom, ALROSA and Transneft. However, we expect FX demand from dividend recipients to outweigh sales of FX by corporates, resulting in pressure on the ruble.
The sanctions theme is likely to dominate in early trade. Late on Friday, US President Trump confirmed that he will sign into law measures already passed by Congress. In response to the new sanctions bill, Russia announced a reduction in US diplomatic staff in Russia and the closure of two US buildings in Moscow.
> Bottom line. Several factors, led by the confirmation of new US sanctions, should keep USD/RUB above 60 today and perhaps lead to a close above the 60.20 high from last week.