Russia FX Beat - September 27, 2017

> Today's focus. Trump to announce tax reform plans.
> Global trigger: Yellen and Trump talk. The dollar continues to climb, boosted by two forces. This move also reflects a partial unwind of the too-rapid dollar depreciation that we warned of.
First, late yesterday, Fed Chair Yellen gave a speech. The main takeaway was that the regulator is determined to raise rates before year end. Despite high uncertainty over low inflation, Yellen talked up the risk of raising rates too gradually. In response, market pricing for a December 13 rate hike to 1.50% firmed up to 70% from 60%.
Second, today US President Trump will announce details of his highly anticipated tax reform plan. Some elements have already been leaked, such as an intention to lower corporation tax to 20% from 35%. There may also be an opportunity offered to companies to repatriate the $2.6 trln of earnings held overseas. While the tax plan is likely dollar-supportive, it faces a tortuous path through Congress and its passage is far from assured.
Aside from Trump's speech, today sees US durable goods orders (15:30 Moscow time) and several Fed officials speak.
> Bottom line. EUR/USD is trading heavily and may push to 1.1730.
> Regional trigger: Ruble pressured. The ruble fell yesterday, as Brent dropped away from $60/bbl and EM currencies fell against the dollar. Today, Russian investors will look to weekly CPI data at 16:00 and US oil inventory statistics due at 17:30.
We would expect USD/RUB to participate in a Trump reflation-related rally in USD/EM FX. Late last year, after the US election, the dollar appreciated strongly as investor excitement rose over Trump's pro-growth agenda. However, the ruble bucked this trend, gaining by over 5%. This was partly related to hope that the US and Russia might reconcile their political differences. Lacking this element now, the ruble could fall in line with EM peers.
Yesterday the overnight FX swap market was volatile. Early on, implied ruble rates fell below 6%, driven by high demand for FX liquidity and the CBR's sell/buy swap limit, which rose $0.5 bln to $1.5 bln and was fully utilized. After 11:30, rates rebounded to almost reach the CBR's upper boundary of 9.5% by the evening. We think this volatility is a result of temporary liquidity shortages due to the settlement of the Finance Ministry's Eurobond swap deal. Although the situation will stabilize, FX liquidity conditions are rather tight, keeping implied rates at a quite low 7%.
> Bottom line. USD/RUB is biased to 58.30. But with R200 bln of profit tax due tomorrow, exporters will limit this move.