At one stage yesterday, the weighted-average overnight FX swap had gained 7bp to 7.36%; however, it closed at 6.23%. The reaction of the NDF market to this was predictable: the front end widened visibly. In particular, 1M and 3M NDFs moved up 20bp to 7.82% and 8.19%, respectively. Meanwhile, 12M NDF closed barely changed at 8.49%. At the same time, longer dated XCCY swap rates moved 4-6bp lower, with the two-year rate closing at 8.18%. Hence, the 1s2s XCCY swap spread moved from - 25bp to -35bp. Meanwhile, RUB interest rates remained elevated amid the ongoing tax period. Yesterday’s VAT might have amounted to RUB 130-160bn, which, in turn, was offset yesterday by settlement of the Monday Treasury deposit auction for
RUB 170bn. The Treasury also rolled over RUB 225bn outstanding deposits for two weeks at an average rate of 8.38%. In light of this, the CBR decided not to expand substantially the one-week repo auction. The regulator yesterday offered RUB 2.4tn vs. an outstanding RUB 2.3tn, making it a switching opportunity for the banks, which have recently been heavy users of the CBR’s overnight standing repo window, itself providing some RUB 100bn each of the last couple of days. At the weekly, total demand amounted to RUB 2.6tn; the average rate was 8.16%, up from 8.12% last week: competition was intense. Therefore, as we have suggested, the CBR decided not to increase the liquidity supply ahead of the remaining taxes. Such a move might
increase pressure on the money market, in our view, sending the overnight FX swap and rouble interbank rates upward. And although the state pension fund is to allocate RUB 50bn on deposits at today’s auction, it does not change alter the near-term outlook. Subsequently, we might see further upward pressure on the front-end rates. However, in our view, the USD deficit situation has not been completely resolved – even if it has eased somewhat. Moreover, time is playing against Russian banks in this sense, because of continuous foreign debt redemptions. Therefore, we recommend receiving front NDF rates on spikes: in particular, the 3M NDF at 8.50% looks interesting.