Russia FX Beat - September 15, 2017

> Today's focus. Russia awaits CBR and S&P ratings decisions.
> Global trigger: US retail sales. EUR/USD traded to as low as 1.1838 yesterday as the US CPI report provided encouragement that inflation could climb over coming months. Core CPI rose 0.2% m-o-m, ending a run of four straight months of 0.1% rises. The core rate held steady at 1.7% y-o-y.
Today will see US retail sales (15:30 Moscow time), industrial output (14:15) and University of Michigan sentiment (17:00). Retail sales and production should both improve, while consumer confidence may have been dented by the recent hurricanes in the US.
On balance, we think the US data flow should support the dollar. Further encouragement is also coming from signs that President Trump and leading Democrats are finding a middle ground on certain policy areas.
Offsetting this is news that North Korea today fired another missile over Japan. With North Korea calling the bluff of the US and its allies, it remains to be seen what, if any, response there will be. The UN Security Council is to convene today while the US has called on China and Russia to take "direct actions."
> Bottom line. We prefer to sell EUR/USD near 1.1930/35 in expectation of a move back toward 1.1850 next week.
> Regional trigger: CBR and S&P decisions. Today brings dual event risks in Russia, as the CBR announces a rate decision and S&P releases its semiannual sovereign rating review of Russia.
We expect the CBR to reduce rates 50 bps to 8.50% at 13:30 Moscow time. This outcome is now quite widely anticipated following the constructive evolution of inflation of late. We think the market reaction will therefore be shaped by the tone of the CBR statement and Governor Nabiullina's press conference at 15:00. Should the CBR warn against the likelihood of future 50 bp cuts, OFZs could witness a selloff, putting pressure on the ruble. For more, see our September 12 CBR preview, "50 bp Cut an Exception, Not the Norm."
Later today, probably after 18:00, S&P is due to release its sovereign review of Russia. The agency currently rates Russia at BB+, one notch below investment grade, but in March it shifted to a positive outlook. Our fixed income team sees a 15% chance of an upgrade to BBB- today, which would provide a broad boost for Russian assets.
> Bottom line. We think the CBR will be cautious in its rhetoric. If we are wrong, a dovish CBR could take USD/RUB toward 57.