Russia FX Beat - July 5, 2017

> Today's focus. Awaiting any global response to North Korea.
> Global trigger: Fed minutes. US markets reopen today after yesterday's holiday with two focal points. The first is the ongoing fallout from North Korea's test launch of an intercontinental ballistic missile. Overnight, US Secretary of State Rex Tillerson described the development as a "new escalation." The UN Security Council will hold a closed session today to discuss any next steps. US President Trump has previously said that such a test by North Korea would not happen. So far, the financial market reaction has been strangely muted.
The release later today (21:00 Moscow time) of the minutes to the Fed's June 14 meeting will be watched closely. In particular, hints over the exact timing of when the Fed will start to reduce its balance sheet will be of interest. The current consensus is consolidating on a potential September start point.
> Bottom line. The North Korea situation warrants caution, as investors await a formal response. Traditional safe havens such as gold, JPY and CHF might be in demand.
> Regional trigger: FX purchases. At 12:00 today, the Finance Ministry will announce the size of FX purchases for the period from July 7 to August 4. On our estimates, monthly FX purchases could drop by two thirds to R14 bln ($235 mln) from R45 bln in June. This would equate to daily FX purchases of R700 mln ($12 mln). July should see a decline mainly due to lower oil, the strong ruble and a decline in Russian oil output to its lowest level since February. Since the purchases were launched in February, the CBR has bought just over $5 bln on behalf of the Finance Ministry.
The weekly CPI data will be published at 16:00 today. Investors will be looking for any clues that poor weather is leading to higher food prices. Weekly inflation has been running at 0.1% for five consecutive weeks. To our mind, a key rate cut from the current 9% by the CBR on July 28 is not certain.
Quiet holiday-thinned markets yesterday left the ruble and oil prices little altered. After its strong rebound, Brent is pressed against the 50d MA resistance level at $49.60/bbl. Reports suggest that Russia is currently opposed to any suggestion that OPEC could deepen the output cuts, ahead of a July 24 oil ministers meeting in Russia. API US inventory data is due today.
> Bottom line. Brent needs to move above $50/bbl for USD/RUB to head back lower to 59.20.