Russia FX Beat - September 6, 2017

> Today's focus. Dovish Fed. CBR to cut by 50 bps next week
> Global trigger: Dovish Fed. The dollar was again on the back foot yesterday, falling against all major currencies. Dovish comments from Fed voter Lael Brainard that the US should be "cautious" in raising rates until the Fed is "confident inflation is on track" to reach 2% certainly played a role. Overnight, another Fed voter, Neel Kashkari, said that hikes may have already "done real harm to the economy."
It should be kept in mind that both Brainard and Kashkari are known doves. Yet their comments fit in with the Fed's current narrative that the onus is on upcoming data to prove the need for a hike before year end. Market pricing for such an increase has fallen below 30%. We also note that the 10y Treasury yield, to which the dollar is highly sensitive, closed yesterday below the important 2.10% level.
Today investors will look to ISM non-manufacturing data due at 17:00 Moscow time and, more importantly, the Fed's Beige Book late in the session (21:00). Investors will also watch Hurricane Irma as it approaches Florida. A direct hit could cause catastrophic damage but would not affect US oil infrastructure.
> Bottom line. Weak dollar to help EUR/USD drift toward 1.1950.
> Regional trigger: A 50 bp cut from the CBR. CPI data for August, released yesterday, shocked the market. A 0.5% m-o-m decline led to the y-o-y rate dropping to 3.3% from 3.9%. The consensus was for a drop to 3.7%. Our economists now see inflation ending 2017 at just 3.4%, well below the CBR's 4% target.
More immediately, we now see the CBR cutting the key rate 50 bps to 8.50% when it meets next week. Thereafter, we prefer to stay cautious, forecasting a year-end rate of 8%. The CBR said yesterday that the scale of deflation in August was more than had been expected. This brings to mind comments made in April before the CBR cut rates 50 bps. We note that CBR Governor Nabiullina will be a speaker at Friday's Moscow Financial Forum.
As for today, weekly Russian CPI (16:00) will give the first insight into the inflation trend in September.
> Bottom line. The ruble reacted strongly to yesterday's CPI data, as the data triggered inflows into the local fixed income market, while local interest rates reacted to expectations of a larger CBR rate cut. USD/RUB is biased toward 57.20.