Russia FX Beat - October 5, 2017

> Today's focus. ECB minutes to offer QE clues, Russian CPI data.
> Global trigger: Tension in Spain. A potential constitutional crisis in Spain is pressuring the nation's financial assets. Yesterday, the IBEX35 equity index fell 2.9%, while yields on Spanish sovereign and Catalan regional bonds are edging higher. Following last weekend's referendum, the president of Catalonia has reaffirmed his intention to declare independence within days - something dismissed out of hand by the Spanish government. For now, the euro is relatively unaffected, but developments in the coming days could certainly impact it negatively.
Elsewhere, our focus will be on the ECB and Fed. At 14:30 Moscow time, minutes to the ECB's September 7 decision will be released. Investors will look closely for any hints about the ECB's future QE plans, which are set to be announced on October 26. In the US, a plethora of Fed officials will speak. In comments overnight, Fed Chair Yellen failed to say anything about the rate outlook.
> Bottom line. A dovish set of ECB minutes, combined with increasing concerns about Spain, may see EUR/USD drop closer to 1.17.
> Regional trigger: Inflation to fall to 3%. Weekly inflation remained flat last week, suggesting that, for September, the CPI fell slightly in m-o-m terms. In our view, the September CPI, which is set to be released today, is likely to fall further to 3.0% y-o-y from 3.3% in August. If so, this might well ignite a debate about CBR rates; markets have yet to firmly price in a 25 bp rate cut for the upcoming October 27 meeting.
CBR Governor Nabiullina is scheduled to visit a fintech forum in Russia, where she may offer policy-related comments.
This morning, we released a short note examining the relationship between FX liquidity and the ruble exchange rate. We find that the deteriorating FX liquidity situation is only having a limited and indirect impact on the exchange rate, unlike in late 2014, when its impact was much more pronounced. To reiterate, our base case for USD/RUB is that it will reach 60 by year end.
> Bottom line. MOEX daily volumes, remaining low, barely reached $3 bln yesterday. A surprisingly low CPI figure could spur demand for OFZs, pushing USD/RUB back below 57.50 today.