Yesterday, the NDF/XCCY rates plummeted 40-60bp and returned to the levels they were at before the CBR meeting when the regulator increased policy rates 50bp. Thus, the 3-month NDF rate is at 10% and 5-year XCCY rate is 8.5%. Nonetheless, the risk premium in short-term NDF rates is about 150bp and in our view can only be explained by the geopolitical premiums ahead of the lengthy holidays in Russia. Moreover, RUB is trading close to the no intervention zone and liquidity leakage via FX interventions is slow, so it does not seem like the NDF/XCCY market considers the scenario similar to a ‘2008-like exchange rate peg’ scenario. The 1s5s spread is about 175bp, which looks too wide in our view, despite the risks of ‘wrong-way’ corporate sector flows. IRS rates also dropped 30-40bp and 2-year is at 9.7% at the moment. It seems that the 3-month MosPrime is priced in from the IRS rates, rather than vice versa, because 3-month MosPrime moved up 65-70bp after the CBR’s 50bp rate hike and is trading at 10% at the moment.
On Tuesday, the overnight FX swap volume was about RUB 300bn and banks attracted RUB 3.15tn at an average rate of 7.54% in the one-week repo auction. It seems that the volume of FX swap facility will be back to RUB 400-450bn today as banks are likely to increase cash holdings ahead of the holidays in May. The CBR also released the money market report for 1Q14, which highlights the fact that the distribution mechanism in the money market has worsened. Repo and interbank market volumes dropped 25-30% (mainly due to the lower participation of the top-5 repo dealers). Interbank FX swap market volumes, however, remained more or less constant. Furthermore, the CBR considers the volume of utilised security collateral to be at 60-70% at the moment and, in our view, the maximum volume of repo operations with the CBR is limited to RUB 3.5-3.7tn in practice, considering the decline in market value of the collateral, the haircuts and the uneven distribution of the collateral in the system.