We take profit on our bearish USD/RUB spot outright, as a risk of a temporarily weaker RUB is looming due to possible anti-Russian sanctions by the US this month. Equally, USD-strengthening risk is present due to the possibility of a Fed rate hike in March 2018.
We see potential for the cross to edge lower still long term, as high carry is still available on the back of a cautious Russian central bank and as the economy continues to expand moderately. The possible rebound in crude oil prices would fuel RUBs strengthening further.
In FX Top Trades 2018 How to position for the year ahead , 6 December 2017, we recommended positioning for a lower USD/RUB on the attractive carry in the RUB, improving crude price outlook, economic recovery in Russia and stable domestic politics. Yet, risks to our RUB trade include the possibility of new anti-Russian sanctions by the Trump administration. In our view, any possible sanctions are likely to be announced by end-January 2018.
In summer 2017, the RUB's extra strong sentiment was already subdued, as President Donald Trump had to sign H.R. 3364, 'Countering America's Adversaries Through Sanctions Act'. Section 241 obliges the Trump administration to pass to Congress the so-called Kremlin report containing 'the most significant senior foreign political figures and oligarchs in the Russian Federation, as determined by their closeness to the Russian regime and their net worth' by end-January 2018. The individuals mentioned could be cut from the US dollar system, losing their business opportunities in western economies.
In addition, the US Treasury has been asked to assess the impact of possible sanctioning of Russia's newly issued government debt. If this sanction is introduced, it could be RUB negative, although only temporarily. It is important to remember that foreign ownership of Russia's local debt has stayed at an historical high, exceeding 32%.
While in December 2017 we expected the Fed to hike twice in 2018, we now expect three rate increases this year. We expect the first hike to be delivered in March 2018, which could halt positive emerging market and RUB sentiment for the time being, adding to USD strength.
Given our current USD/RUB forecast (as of 15 January 2018), we see USD/RUB heading lower in the medium term (56.30 in 3M) with downside pressure on the pair in the long term (55.90 in 6M and 53.50 in 12M). If Russia's local debt is not sanctioned, we see strong downside risk to our short-term USD/RUB forecast.
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