Russia FX Beat - June 15, 2017

> Today's focus. Putin's annual event; Senate's sanctions bill.
> Global trigger: Confident Fed. As expected, the Fed hiked rates 25 bps to 1.25%. There was not much to get excited about, as the central bank retained a view for one more hike this year (we expect this in September). For more, see today's note, "Federal Reserve Review: 25 bp Hike and One More in 2017."
Outside of the decision, we see two noteworthy takeaways. First, while acknowledging the recently soft inflation data, the Fed was not concerned by it. Second, it announced plans to start reducing its humongous $4.5 trln balance sheet before year end. It will initially allow $10 bln of assets to roll off each month, raising this amount by $10 bln quarterly to a plateau of $50 bln. We think this will commence in 4Q, when we expect the Fed to keep rates on hold.
The confidence expressed by the Fed in its normalization process helped the dollar and UST yields reclaim lost ground from earlier in the day. We see little upside for the dollar over the medium term but note that market pricing implies only a 50% chance of another hike before year end and nothing close to the three hikes that the Fed projects in 2018.
> Bottom line. EUR/USD to stay close to 1.12.
> Regional trigger: Senate passes sanctions bill. USD/RUB moved sharply higher late yesterday on news that the US Senate voted 97-2 to pass legislation on new sanctions on Russia. The bill now moves to the House of Representatives, where it is expected to have a rougher ride. A vote in the lower house has not yet been scheduled, but legislators face a hard stop in the summer recess beginning July 31.
The final form of the legislation is not yet clear, but in its current form, it focuses on new sanctions in the mining, metals, shipping and railway sectors. It also suggests looking into possible sanctions to cover sovereign debt and derivative products.
In all, this is clearly a negative development for Russian assets and requires close monitoring. Even if the impact of any new measures ends up being minimal, they could still spark a new round of diplomatic discord between the West and Russia.
At the margin, the risk of new sanctions may encourage the CBR to opt for a smaller 25 bp cut tomorrow. Today sees weekly Russian CPI data and President Putin's annual Direct Line call-in show starting at 12:00 Moscow time.
> Bottom line. USD/RUB has moved decisively above 57. The 100d MA resistance level near 57.60 is the next test.