Russia FX Beat - October 10, 2017

> Today's focus. Catalonian president's address at 19:00.
> Global trigger: Catalonia. Yesterday was a quiet day, with US bond markets closed. Markets reopen today, but the data schedule is quiet. The US NFIB business sentiment index will be released at 13:00 Moscow time, while Fed voter Neel Kashkari speaks at 17:00.
The main focus will be on Europe and Spain in particular. Catalonian President Puigdemont is due to address policy makers at 19:00. The big question is whether he will make an outright declaration of independence that would trigger a huge backlash from Spain's government. If Puigdemont does this, it would start a 48 hour process toward independence. In return, PM Rajoy would likely trigger Article 155 of the Spanish constitution. Once described as an "atomic bomb," this would suspend the region's autonomy.
It is unclear whether Catalonia will choose to go for such a clear confrontational option. However, if it does, the euro may well fall sharply. Rajoy, who operates with a weak coalition government, will address parliament tomorrow in response to Puigdemont's speech.
> Bottom line. An independence declaration from Catalonia would impact a so-far resilient EUR/USD, driving it below 1.17.
> Regional trigger: Risk of deeper rate cuts. September CPI data showed a sharp drop to just 3%, and we now think the probability of deeper CBR rate cuts this quarter has increased. For now we retain our forecast of a 50 bps cut to 8%, but the risk is certainly skewed toward more aggressive easing. The case for such action would increase if inflation ends this year close to the current 3%, as we expect, compared with the CBR's forecast of 3.5-3.8%.
Yesterday we published a short report ("Trade Ideas - Russia Rates: Low CPI Risks Deeper 4Q Cuts") that outlined how investors who expect up to 100 bps of easing in 4Q might want to trade this scenario.
By today, Russian companies will have paid out around R27 bln in interim dividends, which could lead to investor demand for FX in the remainder of the week to convert out of rubles.
> Bottom line. Yesterday USD/RUB mounted a test of its 200d moving average, at 58.34, but failed to close above it. With oil prices supportive, USD/RUB may struggle to retest this level today.