Fading RUB's temporary MXN disease

- "When we talk about a disease in Russia, we usually mean “Dutch disease”, which is commodity-price-driven real effective rate appreciation. We use the term “MXN disease” to describe a recent underperformance unjustified by fundamentals, secular trends and recent recovery in risk appetite."
- "Hard currency external debt redemptions from the corporate sector in the past four months contributed to the RUB underperformance, but have been moderating in September and October."
- "In terms of fundamentals, the very benign inflation backdrop and rapid REER appreciation in Q1 resulted in the Russian Central Bank (CBR) treading cautiously and building up reserves relatively aggressively. When the collapse in implied yields was added to this RUB underperformed. But this is a phenomenon of the past, not the future and something we anticipated in April when we exited the RUB longs that we had been holding since December 2009."
- "Going forward, we think the inflation picture is likely to change this dynamic, driven by food inflation and Russia's recovery. We see the likelihood of a hike before year-end rising significantly and we would not be surprised to see a 25bp hike in mid-autumn. Additionally, we think the domestic hard currency redemption picture should be more benign until year-end and the rouble slightly weaker. We identify a 3% opportunity for the currency gains."
- "Foreign investors’ recent lack of interest in RUB, combined with its recent underperformance in relation to oil, strengthens our conviction."
- "We recommend fading this MXN-disease by buying a RUB basket – selling 3m USD/RUB and EUR/RUB (entry 34.75, stop 35.25, target 33.65, time horizon 1-month, US$5mn on the model portfolio). We intend to add to the position close to the top of the range at 35 depending on the price action."

Nomura EMFX Portfolio Update 20100914

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