Russia FX Beat - June 16, 2017

> Today's focus. Narrow preference for a 25 bp cut from the CBR.
> Global trigger: Inflation doubters. The dollar enjoyed its best day for a month, with the DXY index rising 0.5% yesterday. The gain came despite further disappointing US economic data. Thursday's soft industrial production data followed quite weak retail sales and inflation earlier in the week.
Market-based measures of inflation expectations in the US have been falling and now stand at their lowest level since just prior to the November US election. We can conclude that markets absolutely do not believe that the Fed will be able to hike four times over the next 18 months, as it currently projects.
Today sees the US publish housing starts (15:30 Moscow time) and consumer sentiment data (17:00). Fed voter Robert Kaplan speaks at 19:45.
> Bottom line. EUR/USD is good value near 1.1150.
> Regional trigger: 25 or 50 bp from the CBR. Yesterday proved something of a perfect storm for the ruble, with a stronger dollar, depressed oil prices and sanctions talk all knocking the currency.
The timing of this market move is highly intriguing given that the CBR announces its key rate decision today at 13:30. With USD/RUB above 57.50 for a first time since mid-May and more likely to rise than fall, this could alter the CBR's decision calculus. Yesterday, implied market rates in Russia rose 5-10 bps.
Analysts are split between a 25 or 50 bp cut to the 9.25% key rate (Governor Nabiullina said last week that these are the two options under consideration). We stick to our 25 bp forecast as we think the CBR will not want to imply the potential for a series of 50 bp cuts that a second straight move would suggest.
Ruble and oil price weakness this week, the progress of US sanctions and signs of a pickup in CPI all argue for the CBR to possibly lean toward a smaller rate cut. The alternative would be a 50 bp cut to 8.75%, accompanied by hawkish rhetoric. In reality, the decision is too close to call and at least as important should be Nabiullina's press conference at 15:00.
Elsewhere, the path through Congress of new US sanctions on Russia will remain in focus. Yesterday, Germany and Austria were highly critical of one element that targets Nord Stream 2.
> Bottom line. Activity today is likely to be more focused in the rates market and away from the ruble. A 50 bp cut would risk leading to quite an abrupt repricing for sharply lower rates.