Macro and Vol Commentary
With two vaccines having over 90% success rates against COVID-19, we have seen improved risk appetite. What does this mean for USDRUB?
- Markit Mfg PMI have failed to maintain the strength they had in Q3 when the index reached 51.1. October’s reading declined further into contractionary territory at 46.9. The decline in new order due to domestic clients, but we did see an improvement in export orders
- There remains spare capacity in the Russian economy, as the rate of unemployment increased
- Inflation of input costs have accelerated to grow at the fastest rate since August 2018
- Industrial production fell by 5.9% in October, after a fall of 3.6% in September. YTD production fell 3.1%
- The second wave of coronavirus infections stalled growth in October despite the fact that most businesses remained open
- Re-introduction of lockdown measures in key consumer markets is likely to deteriorate industrial production in Q4
- Markit Russia PMI for services and composite have also moved into contractionary territory, falling from 53.7 to 46.9 and 47.1 respectively
- CPI weekly YTD increased 3.3% but W/W up 0.1% in the week of November 2nd. On a month-on-month basis, CPI has increased 0.4%, and 4% y/y in October.
- The trade balance improved in September to 10.1bn, up from 3.7bn. This was thanks to a large increase in exports, which reached 30.5bn in September, up from 24.3bn the month prior
- The majority of Russian export are oil or petroleum products, and natural gas roughly 58% of exports. The decline in energy demand has hit Russia’s trade balance in recent months but as lockdown restrictions were eased in Q3 the market improved, however as parts of Europe remain in lockdown exports will struggle
- However, prices remain low and demand uncertain, therefore we expect the Russian economy to struggle in the medium term
- DOE Russian crude oil output has fallen sharply in recent months, with production standing at 8.925m barrels a day, down from 10.935m barrels a day.
- Retail sales were weak in Q3 as unemployment was rising, however consumer confidence is rising and this could trigger a return in consumer demand in the coming months; the weak Ruble, a weakening private sector and rising cases across the globe and in Russia provide significant headwinds to the economy
- GDP will rebound next year, along with most economies, but this largely depends on how quickly a vaccine can be rolled out and global energy demand can recover. We expect growth to be around 3.5% for 2021, at this time, after a 5% contraction in 2020
- The economy is continuing to recover, but at a slower pace of -3.6% y/y than Q3. This is expected to remain the case in the near term but optimism surrounding a vaccine will provide support for the Ruble
- The central bank kept rates ate 4.25% in October, the bank have increased currency sales but this has failed to drastically change the trend, and their foreign reserves have clearly fallen
- Coronavirus cases continue to grow, breaking record highs of 20,000 new daily cases
- The economy has relaxed lockdown restrictions in Q3, and has kept hospitality and businesses open despite the rise in daily infections
The currency has been well supported in recent sessions, especially prior to this week’s bond auction, however rising COVID-19 cases and a higher mortality rate mortality rate is a worry for the economy. Demand conditions for key exports remains low, and domestic demand conditions are also weak. The hunt for yield and a weakening dollar are more likely to be to the reason for Ruble strength, than underlying strength in the Russian economy. We could see further gains in the near term as risk appetite improves but the vaccine is not going to be here tomorrow and demand for oil, natural gas, and petroleum products will remain weak in the near term.
With the not just one but two potentially viable Coronavirus vaccines being announced this month we saw most macro FX vols come off since the start of the month. Even short term GBPUSD Vols, with post Brexit negotiations still in play, came off a bit off this news (though these vols still trade high compared to other major pairs like EURUSD/USDJPY).
As mentioned above with the two potential Coronavirus vaccines on the horizon we’ve seen USDRUB spot and vols come off this month and USRUB is no exception. Overall over the last few months we’ve seen USDRUB vols realising lower than implied and if the vaccines get rolled out smoothly (if slowly) we’d over the medium/long term expect that to continue. A slow and steady end to the crisis and recovery in the world economy would see over time increased demand for oil which might see a benefit for RUB. We suggest below a trade idea benefitting from a move lower in USDRUB and reduces vega exposure given the potential for decreasing vol.
USDRUB 1-month Implied and Realised Volatility
USDRUB Trade Idea
- Buy 3 month USDRUB 72.50 strike put in 10m USD for circa 91k USD
- Sell 3 month USDRUB 81.00, 84.00 strike call spread in 7.5m USD a leg for circa 42k USD
- Overall cost circa 49k USD
USDRUB Options - 18/10/2020 to 18/11/2020
USDRUB options positioning for Chart 1 shows a downside bias, in line with spot. The concentration of option volumes in Chart 1 shows an increased appetite for USDRUB in the near term, the put options and volumes towards 72 suggest downside cover for investors. There is little upside cover between 75-80 but there are some call options above 80-85, however call options are very low suggesting limited appetite for higher prices. This could suggest prices fall further below 75.
USDRUB Options - 18/09/2020 to 18/10/2020
USDBRL Options 11/11/2020 - 18/11/2020
This week put options with a large national value have been traded between a 5-5.50 range but these expiries are not until 15th December. Expiries before this date are limited but and trade a narrow range, there is one large put option with an expiry at the end of the month. Options for expiry this month have a narrow around and small notional value, and the market lacks conviction in the near term but as we approach December, the options market suggests a move to the downside.
USDCNY Vanilla Options 11/11/2020 - 18/11/2020
Option volumes for USDCNY this week have a downside bias, put options traded show downside cover below 6.50 towards 6.40. There is some upside cover but little above 7, showing how far the spot market has come. The range is relatively narrow with spot at 6.58 at the time of writing, this suggests the market has little cover for an extreme move in either direction. We anticipate prices will consolidate in the near term.
Charts and Tables
Historical Spot FX Volatility (30D Rolling)
FX Matrix (today)
Key Events & Releases
JP Morgan Global FX Volatility Index
The index has continued to fall in recent sessions, the indicators are in negative territory. The stochastics have started to improve but remain in oversold territory. The RSI is also rising, and the MACD diff is negative and converging suggesting higher prices in the near term. If the index gains support around 7.50, this could trigger gains back towards 8, with the secondary and tertiary resistance levels at 8.19, and 8.40, respectively. Conversely, if selling pressure remains strong, we could see the index take out 7.50, before 7.23. We expect the index to remain on the back foot, the reaffirmation of resistance could strengthen the downside in the long run.
The index has sold off in recent sessions after testing near term resistance, prompting a break through support at 92.12. The stochastics are falling into oversold territory, the RSI is also negative but the MACD diff is also negative and starting to diverge. If the index takes out support at 92, this would help to confirm the descending triangle pattern. If prices take out this level and then 91.75 would help to confirm the downward trend. On the upside, if prices find support between 92.13 and 92 could set the scene for higher prices towards trend resistance. If prices break above trend resistance, this could trigger gains towards the moving averages. The 50 DMA at 92.575 has held strong in recent weeks and kept the downward trend intact. In order to indicate a change in trend to the upside, the index needs to take out 93.
Prices have weakened since USDRUB tested appetite for prices at 81. The stochastics are falling towards oversold and the MACD diff is positive but lacks conviction. The last time prices failed above 81 in March, the market weakened significantly. A descending triangle has been formed and to confirm the pattern, prices need to take out 75.61 and then target 74. On the upside, if support at 75 holds firm, the market could set the scene for higher prices to test the 100 and 200 DMA around 77. Superseding this level, prices need to test 79 to regain upside momentum. The long term trend remains in favour of the USD but the market has consolidated in recent months, a break of 75 could trigger a change in momentum.