Money market: NDFs keep rallying
Yesterday, the front end of the NDF curve tightened 50-60bp, in addition to the substantial moves of previous days. Hence, 1M NDF now stands at 10.52%, while 3M NDF closed at 10.70%. Longer dated XCCY swap rates moved down 30-40bp, with the twoyear rate settling at 9.60%. Clearly, NDF rates have been too high recently, which was a good receiving opportunity. However, there is no more room for further tightening, since rates reached the upper end of the CBR’s interest rate band (10.50%), unless one expects yet another ‘US Dollar liquidity deficit’ episode. In light of this, more negative basis adds to these concerns amid some doubts as to whether the CBR’s FX repo facility will prove efficient later on, since demand has been subdued so far. In addition, some spread widening between offshore and onshore NDF quotes is not encouraging either. However, we highlight that in contrast to August-September, the overnight FX swap rate is relatively high now, so banks secured RUB 2.0bn from the CBR yesterday. Meanwhile, the spread between overnight FX swap and RUONIA is not collapsing, but rather is currently floating around zero. Hence, thus far the price action does not resemble the situation in August- September. Perhaps, the move in NDFs might have something to do with gamma hedging, whilst also implied volatilities started declining. In turn, tax payments drive money market rates higher, which could change at the beginning of December. Overall, if NDF implied yields continue tightening, we think it would become a paying opportunity (although, maybe potentially better executed via CDS to escape the risks of abrupt FX movements amid relatively poor liquidity).
Maxim Korovin, Tatiana Zueva
VTB Capital analysts
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