Yesterday, the overnight FX swap rate closed at 5.69%, i.e. hitting the CBR’s bid. Banks secured USD 473mn from the regulator. Meanwhile, NDF rates did not chase that move. In contrast, 1M NDF closed 2bp higher at 7.45% and 3M NDF widened to 7.78% (+6bp). Longer dated NDFs picked up 10-15bp, with 12M closing at 8.21%. XCCY swaps ended about 20bp higher with the 2-year rate settling at 8.00%. Therefore, the entire curve steepened, likely on the back of CBR Chair Elvira Nabiullina’s announcement during the Russia Calling! conference that the regulator is going to launch USD repos in a matter of weeks. The CBR has likely chosen to use repos instead of swaps in order to keep gross international reserves unchanged. Overall, Russian banks have near USD 40bn in Eurobonds on their balance sheets. The CBR included all liquid mid- and long-term bonds in the repo list in July-August. The regulator’s helping hand would be useful, since, according to the latest statistics, Russian banks’ access to the Eurobonds repo facility worsened in August. Therefore, the key issues are i) the limit on FX repo operations and ii) the exact rate on FX repo. Regarding the latter, the overnight cost of USD in the swap market is currently 1.5-2.0%. This constitutes an implied rate of 6.5-6.7%. Hence, in order to bring the overnight FX swap rates closer to the level of the key rate, the CBR needs to improve its pricing policy.
However, perhaps the best way is to conduct FX operations on an auction basis so as to ensure competitive market pricing. On volumes, we think USD 5-10bn would be sufficient. Overall, if the CBR manages to push the overnight FX swap closer to the RUONIA level, it would likely put some upward pressure on the NDF curve. Historically, NDFs have traded within a 50-70bp spread vs. overnight FX swap. Therefore, we would expect NDF to trade near 8.5-8.7% if the overnight FX swap rate picks up to 8.0%. Current NDF levels imply overnight FX swap at 7.0%.