Yesterday, after the market closed, the CBR launched a new USDRUB sell/buy overnight swap facility to provide dollar liquidity. The implied yield would be around 5.50%, which is lower than the actual money market level.
In line with our expectations (see our RUSSIA – CBR Monetary Policy Decision – Reason prevails of 12 September), the CBR has introduced a dollar FX swap facility to help banks cope with a mild shortage of dollar liquidity, which they had been covering in the swap market. At the beginning of August, overnight FX swap rates collapsed amid an escalation of geopolitical risks. In particular, the spread between the overnight FX swap and RUONIA turned negative by 50bp, while historically it had been marginally positive. (RUONIA is the indicator of the unsecured interbank lending market unsecured.) Therefore, the negative bases are driven by banks’ needs for dollar liquidity. We believe that the regulator is trying to strike a balance between ensuring that the situation does not get out of control (in its role of lender of last resort) and being willing to enforce a natural adjustment mechanism whereby the onshore FX liquidity market comes back to equilibrium via both tighter lending conditions and higher deposit interest rates. Thus, interest rates on the new facility are penal (i.e. lower than market), volumes are limited (USD 1.0bn, vs. the average daily trading volume of USD 8-9bn) and maturities are short term. That said, external debt redemptions (the refinancing needs of the Russian private sector over the next 18 months is near USD 80bn) are manageable and are unlikely to involve significant erosion of FX reserves per se. As for the market reaction to the new facility, the rouble was bolstered as USDRUB slipped from 38.60 to 38.20, and we believe that this pattern is likely to continue for the time being, as recent rouble weakening was partly triggered by the active outright bid from banks seeking for dollar liquidity. The biggest threat for the rouble remains local savings dollarisation.
Daria Isakova, Maxim Korovin, Vladimir Kolychev
VTB Capital analyst
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