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RUB subject to downside risk, USD oversold
Russia: Upside pressures on the currency
In an effort to stabilize the ruble, Russia is looking to expand its Foreign-Exchange reserves (including Gold). Today, Russia will disclose this amount for the period ending 26 of May. Russia’s Central Bank has already made clear that one of its primary objectives is to increase those reserve holdings up to $500 billion as stated by Elvira Nabiullina, head of the central bank.
The reserves currently amount to $405 billion. By the way, Russian gold reserves could officially be above China gold reserves by year end. Regarding the state of the Russian economy, Nabiullina said the economy has been resilient regarding international sanctions. As a result she hinted that interest rates may go even lower. The key rate is standing at 9%.
Data-wise, inflation is collapsing, the last release printed at 4%. We recall that it was at an astonishing 16+% two years ago and the consumer prices growth is now standing at 4%. The unemployment rate is also on its way down and is now reaching 5.2%. However, real disposable income should continue its decline in May after the strong decline in April of -7.6%. We reload our RUB short position against the dollar for some more time and we target 57 ruble for one dollar in the short-term.
The data from the US continues to provide evidence that economic activity is improving from a soft 1Q. The ADP labor report and initial claims (180k and 238k respectively) are expected to indicate that labor markets remain strong and suggests a solid payroll read on Friday. In addition ISM manufacturing and construction spending (54.7 and 0.5% respectively) should indicated that growth is strengthening.
In the mid and long term we remain bearish on USD, however we currently see USD positioning oversold. European / US interest rates differentials have spread excessively wide in our view indicating a probable correction should the economic data force repricing of the Fed interest rate hikes. Today's Final EU PMI is unlikely to provide real insight into the European outlook.
We are constructive on the USD against G10 currencies in the short term. GBP continues to be driven by political uncertainty rather than economic fundamentals. Despite the fact that Theresa May missed a party leaders' debate and select polling results, bookmakers still assign a low probability of Labour ousting the Conservatives from power. Should the Conservatives hold on to power we anticipate a move to 1.30 on the reduction of domestic political concerns.
Brazil GDP expected to grow 1%q/q in the first quarter
Over the last couple of weeks, the Brazilian real has been mostly driven by political jitters rather than economic developments. The panic sell-off that took place after the alleged corruption of President Michel Temer is definitely over as market participants continued to discount an impeachment, in the short-term at least.
The real recovered partially from the sell-off with USD/BRL back below 3.25, compared to more than 3.40 exactly two weeks ago. Implied volatility eased substantially - 1m gauge fell to 14.74%, compared to 23.50% 2-weeks ago - suggesting that investors are confident again holding Brazilian assets.
On the fundamental side, the BCB cut the Selic rate by 1% yesterday. The decision was broadly expected by investors and had no effect on the currency. According to the latest BCB’s week survey, economists expect the Selic rate to reach 8.50% by year-end, while the main inflation gauge should stabilised 50bps below the central bank’s mid-point target of 4.50%.
As long as the political mess doesn’t escalate, we remain constructive on the real as investors mostly seized the opportunity to enter into long BRL positions at a discount. First quarter GDP growth is due for release later today. Growth is expected to have reached 1%q/q during the March quarter. A positive reading should accelerate the BRL recovery.