Russia FX Beat - September 4, 2017

> Today's focus. Korean Peninsula on edge; US holiday today.
> Global trigger: North Korea. It should have been a quiet start to the week since US markets are shut for the Labor Day holiday. However, North Korea's test of a hydrogen bomb over the weekend has put markets on edge. The UN will hold an emergency session today. Meanwhile, there are reports that North Korea is preparing another missile test.
Friday was volatile. US labor data underwhelmed in terms of jobs and wage growth, again raising questions about whether the Fed can hike rates before year end. Markets continue to price the likelihood of a hike before year end at just above 30%.
This week, the main focus is Thursday's ECB decision. Reports indicate that it will not announce plans to scale back QE (currently set at EUR60 bln per month until year end) and, on Friday, it was reported that such a decision might not be made until December. We believe that the euro's strength is a key reason why the ECB is delaying an announcement, for fear of spurring even greater appreciation.
> Bottom line. Developments around North Korea support JPY and gold prices. EUR/USD to hold near 1.19 in quiet trading.
> Regional trigger: Awaiting CPI data. The ruble was a strong outperformer last week, posting gains that far outstripped any other currency. On Friday, USD/RUB touched an intraday low of 57.37 as Brent reached almost $53/bbl.
The ruble's strength and last week's inflation expectations data seem to point toward a 50 bp cut at the CBR's September 15 meeting. August CPI data will come out on Tuesday-Wednesday and is forecast to drop to 3.7% y-o-y. We might receive guidance on Friday when Governor Nabiullina speaks at the Moscow Financial Forum.
Today, the CBR launched a supplementary mechanism for liquidity provision (MEPL) that will allow banks with temporary liquidity problems to tap it for a period of no longer than 90 calendar days at rate of the CBR key rate plus 175 bps. The list of securities eligible to be put down is wider than that for standard refinancing operations, i.e. on the Lombard List. Clearly, the CBR wants to calm markets, sending a signal that banks can obtain liquidity from the CBR in periods of stress. With regard to Otkritie FC Bank, it seems that the situation has improved. On Friday, CBR Deputy Governor Pozdyshev said that clients had begun returning funds back to the bank. In addition, the amount of the CBR's fixed-rate ruble repo dropped by R110 bln
> Bottom line. USD/RUB targets a close below 57.50.