Friday's session in the money market was extremely busy, with S&P's downgrade, the CBR's unexpected rate hike and MET tax payments. Our view on the CBR's policy action is set out below, but the market's reaction to the news was predictable. First thing in the morning, the front end saw quite aggressive bidding on the back of the rating news. During the early trading hours, rates climbed 30-40bp, while the news on monetary policy tightening fuelled an additional 10-20bp increase. Hence, the one-year XCCY rate now trades near 9.90-10.10%. 3M MosPrime widened 23bp to 9.39% (again prior to the CBR's decision), while FRAs surged 50bp with 3x6 FRA trading at 10.00%. The IRS curve moved up 20-25bp along all tenors and the basis narrowed 5-10bp on the longer end, while the one-year basis turned positive, having tightened near 60bp. Hence, it looks like any further upward adjustment in the rates on the back of the CBR’s decision would be limited, unless one expects more rate hikes to come.
Longer-dated XCCY rates picked up 40-50bp, so the 1s5s spread reached -112bp (-20bp). It does not seem likely that this decision is temporary in nature, so the inverted slope of the XCCY/IRS curve is not justified, albeit we would expect the risk premium on 6-12-months to move down as the CBR already made a bold move. In addition, we think that in the current environment, the prospects for wrong-way flow activity are faint. In addition, banks secured RUB 452bn from the CBR in the overnight FX swap window, as the MET/Excise payment was likely quite heavy. At the same time, as we have highlighted before, we expected banks would have to run near RUB 500bn in FX swap with the CBR.