Russia FX Beat - October 26, 2017

> Today's focus. ECB attempts to pull off lower-for-longer taper.
> Global trigger: ECB taper. All eyes today will be on the ECB policy decision, which is set to include a plan on how it will scale back its QE in 2018. Currently, it is committed to buying EUR60 bln of assets per month until the end of this year.
A key objective of the ECB will be to avoid triggering a new surge in the euro (the strong performance of the currency this week suggests investors think it will struggle to do this). This will likely be best achieved by convincing investors that QE will continue for a long time to come. With the amount of bonds available to buy dwindling, the ECB is constrained, balancing how much to reduce monthly purchases by with how long to carry on buying.
A "dovish taper," or a lower-for-longer strategy, is seen as perhaps the best way to prevent euro appreciation. For example, the ECB could say it would buy EUR30 bln per month for nine months, i.e. through 3Q18. An alternative is to buy EUR20 bln each month, but until end 2018.
Finding a balance that keeps markets stable will be extremely challenging. The decision will be announced at 14:45 Moscow time and President Draghi will give more details at his press conference at 15:30.
> Bottom line. The ECB is limited in its dovish taper options. We are inclined to buy any EUR/USD dip toward 1.17.
> Regional trigger: Ruble edging lower. Yesterday's 0.1% w-o-w CPI reading for the week ending October 23 means that the CPI is up 0.2% so far this month, as measured by this narrower inflation gauge. Rising fruit and vegetable prices (up 3.4% w-o-w) were the main driver and are set to remain the main driver in coming weeks. Still, this month's CPI is likely to undershoot the 0.4% m-o-m rise from October 2016, suggesting the y-o-y rate will drop below 3%. Our view is that the CBR will cut its key rate by 25 bps tomorrow.
The ruble saw heavy trading volumes yesterday, which approached $6 bln on MOEX. Exporters were very active in selling FX, most likely to pay local taxes. The fact that USD/RUB edged higher for a fourth consecutive day underlines strong demand to scale back ruble positions. This is due to event risks related to the ECB and CBR decisions and a tougher backdrop for EM FX.
> Bottom line. With yesterday's major tax deadline in back of us, we see a good chance that USD/RUB pushes higher. A close above 57.80-57.90 would be a bullish signal.