Russia FX Beat - June 22, 2017

> Today's focus. Ongoing slump in oil. USD/RUB above 60.
> Global trigger: Fed error? Global markets are quiet, with no major data to speak of today. There will be interest in an EU leaders' summit that commences today, with Brexit the hot topic. But this is a local issue, without major global implications.
In general, the dollar remains well supported. We note increasing talk about whether it would be a policy error from the Fed to hike rates again soon given inflation is quite low. The prospect of this would be particularly unnerving for EM FX.
> Bottom line. The DXY index is steady and likely to hold near 97.50 today.
> Regional trigger: Oil bear market. The ruble continues to slump and is near to its weakest level of the year. A chart of USD/RUB looks very ugly, with recent price action taking on a somewhat disorderly appearance that has not been seen for many months. That said, we certainly do not think conditions are anywhere close to a point where the CBR would consider FX intervention to support the ruble. In the context of its inflation-targeting regime, the most obvious read-through from a weaker ruble is that future CBR rate cuts are priced out of the market.
The ruble is of course taking its lead from oil prices. Brent is currently in an exceptionally well-defined downtrend. As is the wont of a bear market, the oil market brushed off a mixed DOE inventory report yesterday and comments from Iran that OPEC might consider additional output cuts. Although speculation is a driving force in this oil bear market, it is also clear that the calculus has been altered on the fundamental side. Nigerian and Libyan output has risen sharply, while US production has reached its highest level since mid-2015.
To date, it does not appear that internationals are capitulating out of previously profitable Russian trades. Trading in local OFZ markets has been solid, with decent two-way flows. If this were to change, it would suggest a much more concerning short-term outlook. New news on sanctions could be a catalyst.
> Bottom line. The Brent bear trend indicates critical support at around $44/bbl. Although we do not see current justification for further sharp gains in USD/RUB, it has broken above its 200d MA at 60.11, and therefore a move to 60.50 is clearly possible.