Russia FX Beat - July 6, 2017

> Today's focus. Russian CPI in June to rise; busy US data day.
> Global trigger: Intense Fed debate. The dollar was on balance stronger yesterday, with markets calm in response to developments relating to North Korea. This is sure to be a hot topic at the G20 leaders' summit starting tomorrow.
Overnight, the Fed released the minutes to its June 14 meeting at which it raised rates 25 bps to 1.25%. These showed a Fed split over its next policy step. Several members favor starting to reduce the balance sheet by $10 bln per month "within a couple of months", i.e. September, while others prefer to wait.
Overall, in our view, this is a question of sequencing. The Fed believes inflation is currently low due to temporary factors. If so, the Fed will hike rates and start cutting its balance sheet at separate meetings before year end. It simply needs to decide between September and December for each of these steps - our view is that the hike will come first, in September. The bigger issue would be if inflation stays subdued, throwing into doubt this two-step strategy altogether and also the scope for 2018 hikes.
Today's highlights include US ADP employment (15:15 Moscow time) and ISM non-manufacturing (17:00) data. President Trump is due to give a "major speech" in Warsaw.
> Bottom line. EUR/USD to hold in a 1.1350-1.1375 range.
> Regional trigger: CPI bump. Weekly CPI data to July 3 rose an outsized 0.4% yesterday, but this is largely explained by the annual tariff hike that occurs at the start of July every year. Yet the tariff rise this year was less than in 2016 (2.3-4.1% versus 3.4-5.5%), suggesting price pressures came from elsewhere too. The main culprit looks to be food prices.
If this increase does not subside in the next few weeks, it would present a problem to the CBR cutting its key rate on July 28. The CBR has said food prices are a more important input to anchoring inflation expectations than the ruble. At 16:00 today, CPI for June will be released and the y-o-y rate is set to rise to 4.2% from 4.1% - a first increase since June 2016. Igor Dmitriev, the head of the CBR's monetary policy department, speaks at 15:00 today.
Overnight, US API oil inventory data showed a sizable 5.8 mln bbl decline in stocks. EIA inventory data is due today at 18:00. Oil prices slipped by over 2% yesterday.
> Bottom line. USD/RUB closed at 60 yesterday and its next target is to hold above the closing high of 60.32 set on June 21.