Russia FX Beat - October 13, 2017

> Today's focus. Trump to speak on Iran; US retail sales and CPI.
> Global trigger: US CPI and retail sales. Fed non-voter Eric Rosengren said overnight that a rate hike in December "seems appropriate," supporting current market pricing of 75% for such an outcome. Also overnight, US officials said that a decision on the new Fed chair is still "some time away." Current chair Yellen's term ends in February.
Today's focus is likely to be on an anticipated decision by US President Trump to remove his backing for a multinational deal to halt Iran's nuclear program. An official US withdrawal from the deal would still require approval from the US Congress.
Of more market relevance will be September US retail sales and CPI data at 15:30 Moscow time. The dollar might draw some support from an expectation for headline CPI to jump to 2.3% y-o-y, while the core measure is also seen edging up, to 1.8%.
> Bottom line. We expect EUR/USD to edge back toward 1.18, supported by decent US economic data.
> Regional trigger: CBR set to lower CPI forecast. Reuters reported yesterday that Chinese conglomerate CEFC intends to use mostly borrowed funds for its purchase of a 14.16% stake in Rosneft from QHG Oil. Up to $6 bln may come from VTB as a bridge loan for 1y. The execution of such a large transaction would significantly deteriorate local FX liquidity, especially if it comes in December. Implied ruble FX swap rates could fall significantly and O/N basis widen to more than -100 bps.
However, it is unclear when the deal will be settled. If it is settled in October or November, the market reaction would likely be milder due to the seasonally stronger current account and increased FX inflows. Should settlement happen in 1Q18, the market reaction could be even softer, as we expect an FX liquidity inflow of more than $10 bln.
In comments yesterday, CBR Governor Nabiullina admitted that year-end CPI could be near 3.2%, below last month's guidance of 3.5-3.8%. However, she qualified this by saying that inflation of 3% or even lower for a short while would be fine and not a major deviation from the target. This backs up the view that the CBR is opposed to an acceleration of policy easing. Our forecast is for rate cuts of 25 bps at both of the two remaining meetings this year.
> Bottom line. The intraday trading range for USD/RUB has been exceptionally small this week. This trend should persist today, with USD/RUB holding near 57.50-57.75.