Last Friday, the overnight FX swap rate was quoted at 0.96%, a record low level, while the weighted-average FX swap for the whole session printed at 4.64% (also extremely low by historical means). So, what happened? It was likely a technical issue, as it looks as though some banks did not prolong their general deposit agreements with the CBR in a timely manner and were unable to use the deposit facility, so excessive cash hit the money market. At the same time, Friday was the last day of the January-February averaging period, and therefore banks in bulk did not need additional liquidity on that particular day, given that all regulation needs were already met. Today, we think money market rates might remain low as well, but with the beginning of the new averaging period, a better strategy would be to park excessive cash on correspondent accounts in order to boost the average balance. We also highlight that a substantial amount of liquidity was injected from the budget at the beginning of the month – we estimate the consolidated cash deficit at around RUB 420bn – which helps to relieve the stress in the money market.
Meanwhile, rate markets have shrugged off extreme overnight rates (unsurprisingly), as front end NDF rates closed unchanged, with 1M seen at 6.48%, while mid-term CCS rates have actually widened. 3M MosPrime tightened near 9bp to 7.05%, while also the 6x9 FRA moved down 55bp to 6.75% on the back of profit taking. The IRS curve moved down a couple of basis points as well, meaning the basis swap has tightened near 2-4bp along the whole curve. To reiterate, we think receiving IRS looks interesting at current levels, as the spread to 3M MosPrime looks appealing, since on a forward basis IRS prices in some widening of 3M MosPrime, which we think is unlikely to happen in the near term. To recap, the CBR is holding a 312-P auction today for RUB 200bn at a minimum rate of 5.75%. We expect substantial demand, while the injection of mid-term liquidity is set to fuel a further downward move in 3M MosPrime. Also, we remind that at the end of the week, the CBR is due to hold its first policy meeting of 2014 – we maintain our view that the regulator will remain on hold, especially given that volatility in the FX market has subsided and that BASKET remains in the USD 200mn daily intervention sub-range.