Yesterday, the CBR effectively shifted to a dirty float FX regime and made the terms of FX repo more attractive.
Changes to the intervention mechanism
The CBR commits to sell (purchase) USD 350mn per day once the value of the bi-currency basket reaches or goes beyond (which was never allowed before) the upper (lower) bound of the operational band (39.55-48.55 as of yesterday morning).
Should it see risks to financial stability, the CBR will be willing to undertake additional interventions with no specific rules.
The ‘5-kopeks shift’ rule was left unchanged – now there should be no more than one 5-kopek shift a day.
Changes to the FX repo facility
FX repo maturity is extended to 12 months (on top of 1 week and 28 days).
The margin charged on top of Libor was cut to 1.5% flat across maturities (vs. 2.00-2.25% previously).
The 12-month auctions are to be conducted on a monthly basis, with the first USD 10bn to be offered in mid-November.
The limits on 1-week and 28-day FX repo auctions are to be maintained at USD 2.0bn and USD 1.5bn through the year-end.
The aggregate maximum limit of FX repo facility until the end of 2016 was left unchanged at USD 50bn.
Although the corridor system was not abandoned completely, for all practical purposes the changes make the band irrelevant and mark the shift to a dirty float system. The intervention mechanism is now less predictable and the CBR is better equipped to fend off speculative pressures. This is also good news for RUB liquidity, as large sterilisation via FX interventions carried considerable risks of squeezing the money market at the end of the year.
The cost of FX liquidity from the CBR is now much closer to market pricing, while extending maturity enables banks to use it as a funding source for lending out in USD to corporates that need to redeem external debt. The overall limit for the FX repo facility until the end of this year is set at USD 13.5bn, which will cover the short-term refinancing needs of the corporate sector in our view. The risk is that corporates continue to hoard FX for future redemptions (2H15 and beyond), but the one-way market trend seems to have been broken, shaking the conviction that it makes sense to do so; and in any case, the CBR might well increase limits further.
Overall, this policy action is likely to ease pressure on spot FX and we see the fair value of USDRUB at 42-43, at USD 80/bbl and with no additional sanctions. The intensity of savings dollarisation remains the biggest risk in the short term.