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Money market: NDFs higher despite stable overnight; time to open flatteners

Yesterday, the overnight FX swap remained at low levels, with the weighted average rate printing at 6.49% (+9bp). However, we highlight that NDF and XCCY swap rates still picked up. Specifically, 3M NDF closed 3bp up at 7.46%, while 12M NDF ended at 8.22% (+7bp). In addition, longer dated XCCY swap rates widened near 10bp, with the 2-year rate closing at 8.21%. We highlight that the XCCY swap curve has steepened markedly during the past weeks; in particular, the 1s2s XCCY swap spread now stands at just -14bp, compared with -50bp at the beginning of September. The steepening was driven solely by the front end, which moved considerably lower on the back of falling overnight. However, we think that the CBR’s outright FX interventions will help to ease the issue with USD deficit. In turn, this could push the NDF curve higher. Meanwhile, the disinflation outlook for next year remains intact thanks to the supportive base effect, cooling economy and monetary tightening that has already happened. Therefore, we think it makes sense to build some flatteners now with a view that the front end could widen on the back a of higher overnight rate and the growing probability of a CBR policy response to FX volatility, while the absence of a substantial bid on the XCCY curve, coupled with potential ‘wrong-way’ flow activity, would likely restrain any considerable move higher in XCCY swap rates.
Maxim Korovin, Tatyana Zueva
VTB Capital analyst

money market

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