Yesterday, the CBR’s one-week repo auction was settled, but it provided no liquidity injection on a net basis as the one-day auction was not extended. Consequently, banks sourced RUB 151bn from the regulator in the FX swap window. At the same time, banks have increased the balance of correspondent accounts to RUB 1,175bn, i.e. by RUB 154bn since the beginning of the week. This explains why banks still rely on FX swap even though the CBR injected almost RUB 200bn in repo. In our view, banks do not need that chunk of money to meet the required reserve averaging needs, as the average balance for the May-June regulatory period looks okay. In addition, today the State Pension Fund is to conduct a deposit auction prepared to inject RUB 100bn of liquidity, so we think the situation will improve marginally and demand for FX swap with the CBR is to subside. However, keeping in mind that Monday is MET payday, any relief is not going to be long. Overnight rates remain stable near the 8.50% level, which is going to persist, in our view, at least until the beginning of June.
Meanwhile, front-end NDF rates tightened 15-20bp more yesterday, with 1M NDF at 8.75%, while 6M NDF closed at 8.82% inspired by the stronger FX. Thus, NDF rates now stand at just 20-30bp over the level of the overnight FX swap in the market, which, in our view, leaves limited room for further tightening. Moreover, it means that market participants almost completely shrugged off the possibility of a rate hike in June, even though inflation remains quite stubborn. In our view, selling NDFs here does not look attractive anymore. Meanwhile, longer-dated XCCY swap rates nudged down only 5-10bp, so the curve has steepened a little more. We expect steepening to continue as there are no signs of ‘wrong-way’ flow activity so far, while if disinflation in 2H14 is less than expected, we think expectations of monetary easing could start to fade away. Thus, we still recommend entering into steepeners.