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Money market: FX swap dropped substantially just before the bell


Yesterday, the overnight FX swap came into the spotlight, dropping to 8.60% (-145bp) in the final trading minutes. The weighted average also moved lower, but still remained within the policy rate band, printing 10.26% (-55bp). Even accounting for the comfortable liquidity environment at the moment, the move was too sharp, likely driven by a sizable liquidity inflow (and probably of a one-off nature), when the CBR's deposit facility was already shut. Apparently, the volume of FX swaps with the CBR remained at the zero level, while the volume of the overnight repo declined to RUB 18bn. The other money market rates traded generally wider.

Intensified FX volatility put pressure on the XCCY curve, which shifted up 25bp, with the one-year tenor closing at 11.91%. Longer NDF rates moved up 20bp, but short tenors were relatively resilient, with the three-month rate inching up a marginal 4bp. The IRS curve widened 10bp at the front end, while other tenors rose 4-7bp. At the same time, 3M MosPrime dropped 23bp, edging down to 11.97%. Judging by the strength of yesterday's bid in the short-term rates market, we think NDF rates might surge higher on the back of returning FX spot volatility and growing concerns over Brent testing year lows in the near term.

However, we highlight that the spread between front-end NDF implied rates and overnight FX swap has widened to 150-180bp which, historically, has signalled a good entry point to sell rates. In the meantime, the NDF curve has steepened with the 3m12m spread reaching -18bp yesterday, up from -70-80bp last week. Thus, we think selling 12M NDF looks more attractive, when the FX spot stabilises.

Today, the one-week repo auction is in focus, with the main question being whether the CBR will decide to keep a generous limit again. In addition, the Treasury scheduled the auction for today, offering RUB 150bn at two-week deposits.

Maxim Korovin, Tatiana Zueva
VTB Capital analysts

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