Articles
14 June 2019

FX: Russia set to cut rates by 25bp

Russia's central bank meets today and is widely expected to start reversing the defensive rate hikes made last year. Here's what we expect from the rouble and the rest of the FX complex

USD: Dollar in holding pattern ahead of Wednesday’s FOMC

Radio silence from Fed speakers and softer data overseas has allowed the dollar to recover a little ground this week, although we still think it looks fragile against defensive currencies such as the Japanese yen and Swiss franc. Barring any escalation in trade wars or middle east tension, the focus today will be on US activity data – Retail Sales and Industrial Production. These disappointed in April, dropping the Atlanta Fed’s Nowcast model reading of 2Q GDP back to 1.1% at the time – which has since bounce backed to 1.4%. Better activity data today may deliver a brief reprieve for the dollar.

EUR: ECB easing expectations grow

Euro area market interest rates continue to decline, with a 10 basis point deposit rate cut now well on the way to being priced in over coming quarters. This comes at a time when market-based measures of inflation expectations are continuing to collapse. However, we expect to see euro weakness expressed through lower readings of EUR/JPY and EUR/CHF, rather than EUR/USD. Here, we think a weaker dollar story will win out this summer and EUR/USD can consolidate in the 1.12-1.14 area. As an aside, yesterday saw the ECB’s annual report on the international use of the euro. Its use is edging up and we believe the vagaries of Washington policy will accelerate this process as the public and private sectors look to find ways to reduce their commercial exposure to the dollar.

GBP: It’s Johnson’s to lose

Boris Johnson looks very likely to be one of the two leadership candidates to be put forward to party members later this month. Expect him still to run on a 31 October Brexit ticket until No. 10 is secured. Cable looks capped at 1.2750/2800.

RUB: CBR looks set to deliver a 25bp cut

The Central Bank of Russia meets to set interest rates today and is widely expected to start reversing the defensive rate hikes made last year. We look for a 25bp cut to 7.50%, followed by another cut in September. Investors will be looking for signs that the CBR is more confident in the CPI path (revising down the 2019 year-end forecast from 4.7-5.2%), upon which very strong demand for local OFZ bonds has been based. These flows into OFZs have been the key driver of rouble strength (the RUB is the best emerging markets FX performer this year) and worth around US$3 billion in May alone. We believe that dividend payments (especially in July) will limit the rouble’s upside at a time when the balance of payments seasonally softens. We’d be surprised if a widely expected rate cut today triggers enough of a rally in OFZs to drive the rouble below the 64.00/64.25/USD area.


Disclaimer

"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.

This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.

The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.

Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.

ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).