• FxWirePro: is skew-atm volatility of USD/RUB justifiable? menace of US sanction on Russia drives CBR dovishness

    Source: FxWire Pro - Central Bank / 27 Jul 2017 06:28:07   Eastern Standard Time

    The planned US sanctions against Russia mark a new low in the political relations between the two countries. The US legislation projects new sanctions against state-owned Russian companies in the mining, metal, shipping and railway sector.

    Moreover the fines will not simply be limited to Russian but all companies that deal with Russian oil and gas companies. This “extraterritorial effect” of the US sanctions has caused a fierce conflict with the EU.

    It is already threatening “retaliatory measures” as many European companies would be affected by the sanctions. The US measures would have an effect on the entire gas and oil supply of Europe and constitutes a clear turning point in the political approach towards Russia on the part of the US.

    President Donald Trump, so far a supporter of Russia who went into office with the aim of improving US relations with the country seems to be bowing to political pressure within the US. A White House spokesman has already signaled approval of the legislation, while Senate still has to ratify the bill.

    An easing of the sanctions will no longer be so easy now. The US President’s competence in this respect was severely limited and he can no longer decide on the matter on his own.

    In view of this seismic shift, the ruble is likely to remain volatile and the Russian central bank’s meeting tomorrow is likely to be a non-event. Following the moderate 25bp rate cut to 9.0% in June the central bank is likely to take a wait and see approach anyway.

    While JPM now calls for the high carry-to-volatility of RUB makes the currency attractive to longer-term investors in our view.

    Shorting the RUB in volatility space seems to be very expensive: implied vol is one of the highest in EM and risk reversals are the highest. The skew-to-ATM volatility ratio has been rising steadily since early 2016, likely related to investors hedging bullish RUB price action. These volatility parameters favor structures that sell topside skew to cheapen up bullish USDRUB exposure.

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