RUB: Bullish in the long term - Danske Bank

Analysts from Danske Bank remain bullish in the Russian ruble in the long term on high rate differential and domestic story supporting the currency. 

Key Quotes: 

“Russia’s economy continues to grow. In Q2 17, the economy jumped 2.5% y/y versus 0.5% y/y a quarter earlier. According to the final data, Q3 17 has slowed down to 1.8% y/y. Agriculture and service sectors were the main contributors, while support is also coming from recovering retail sales. We keep our 2017 GDP growth estimate at 1.9% y/y and at 2.0% y/y for 2018. We expect the economy to grow 2.1% in 2019.”

“The presidential election in March 2018 is likely to be a non-event for the markets.”

“Russia’s rigid fiscal discipline is set to continue through the next presidential term 2018-2024. We could see the budget deficit approaching 0.0% of GDP in early 2020s already. We expect the current account surplus to continue through the next years.”

“On 15 December, the CBR cut its key rate by a surprising 50bp to 7.75%, while together with Bloomberg unanimous consensus we expected a 25bp cut. We expect the CBR to continue its moderate cuts, bringing the key rate to 6.75% by end-2018, keeping real rates highly elevated.”

“Inflation fell further under CBR’s 4% y/y target, posting 2.5% y/y in November, which is an all post-Soviet time low. Yet, the CBR wants to anchor long-term CPI around 4% y/y, which better explains the central bank’s objective.”

“We remain bullish on the RUB in the long term, as high rate differentials prevail and the domestic story supports the currency. Short- and medium-term prospects are murkier, however, as external factors such as the oil price and geopolitics put notable pressure on the RUB.”

“Possible introduction of the new anti-Russia sanctions by the US by the end of January 2018 is a serious short- to medium-term risk for the RUB, Russian stocks and government debt. Worsening sentiment could pause foreign direct investment flows and accelerate inflation. Upside risks come from an increasing oil price and improving relations with the West.”