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NDFs tighten on stable overnight

The situation with banking liquidity improved yesterday, as the Treasury allocated RUB 300bn at 18% in a 34-day deposit auction (there was only one bid). Meanwhile, even without it, banking liquidity is ample (as we have already highlighted). Hence, on Wednesday RUONIA declined 12bp to 17.07%, while the CBR and budget sterilised RUB 600bn combined. The total balance of correspondent accounts decreased to RUB 1.4tn on that day, which is still well above the RUB 1.1-1.2tn that we think is the optimal level for the banking system. In light of this, the overnight FX swap rate remained stable at 16.60%, which fuelled a further rally in front-end NDF rates. In particular, 1M NDF tightened 1.6pp to 19.54%, while 3M NDF declined 2.0pp to 20%. Longer dated XCCY swap rates moved down 50bp, with the 2-year rate closing at 14.55%. We also highlight that the spread between offshore and onshore NDF rates declined visibly and have returned to the normal range on the very front end, while still looking a bit elevated on the 1M horizon, although not as extreme as a couple of weeks ago. Finally, we highlight that the spread of 1M and 3M NDFs against the overnight FX swap decreased to 200-250bp, which is close to the historically normal range: usually, this is within 150bp (even 50bp before 2014). Meanwhile, 12M NDF has actually slipped below the one-month average overnight FX swap level, for the first time since the end of 2013. Therefore, we think that NDFs are close to being fairly priced against the current level of short-term rates (perhaps, some room is still left), while further tightening is dependent on the outlook on the CBR’s monetary policy.
Maxim Korovin, Tatiana Zueva
VTB Capital analyst

money market, NDF

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