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Rosbank- Morning Focus Russia: the long-awaited MTRO day, Jul 29, 2013.

Last week saw relief recovery across GEM faltering with EM FX feeling jittery by the end of the week and RUB in particular coming under significant pressure despite support from export sales and FX interventions. This week is likely to see yet more volatility with global markets taking their cue from multiple data releases and series of CB meetings. SG's global economist/strategists expect a nuclear (for EM sentiment) combination of strength in US (ISM/NFP) and weakness in China (official PMI).

I am not to argue RUB is immune at all (more resilient to aFED tapering' and much less so to aChina landing' in my view) but accumulated under-performance versus EM FX pack (some 16 currencies) over the previous week (some 1.2%) does, perhaps, leave room for some relative out-performance in case of broader EM FX sell-off this week. In any case I would rather stay tactically neutral as upside potential in RUBbask from here is limited and RUB shorts are soon to face another step-up in CBR FX interventions when RUBbask reaches 37.8 (up to $350-400mio from $200mio currently). Strategically, I stick to short EURRUB opened on Friday.

In the meantime the biggest local news this week is the first 1y MTRO auction today. I believe there should be sufficient demand for the entire RUB500bio being auctioned and it should translate into better liquidity environment fairly quickly, pushing cash money-market rates (and o/n FX swaps) to the CBR's auction-REPO rate (5.5% now). If the entire RUB500bio are taken by the banks today, I estimate REPO debt should fall south of RUB1.5trln (i.e. REPO collateral use of about 35% vs 55% now) by mid-August and is unlikely to exceed RUB2.0trln (which now seems to be the new stress-threshold for the money-market) before late September by when another MTRO auction is fairly likely.

At the same time I cannot rule out a situation when interest rate on the first MTRO auction is set relatively high - closer to the upper bound (or even north of it) of 6.0-6.5% for market consensus. At the end of the day 1y official MTRO funding is competing with 1y market funding (be it bonds, retail or corporate deposits) which is now priced around 7.0-8.0%. This outcome might delay decline in 3mMosprime fixings for several months (after additional MTRO auctions finally push it lower) and thus spook IRS receivers.

To sum up, tactically I prefer ultra-front-end FX implied receivers (3m at 6.30%, with the target at 5.70% and stop-loss at 6.50%) and would look to add to IRS receivers on potential spikes post-MTRO. As for OFZ, better liquidity environment following MTRO auctions should be supportive - as the pressure on REPO-able collateral eases the gap between CBR REPO rate and FX implieds is to compress making carry for foreign OFZ holders more attractive. That said, I would rather wait out the key risk event this week to see if they provide for better entry levels in OFZ.

***Trades&Ideas:

Receive 12m NDF implieds (open: 6.35%; target: 5.80%; s/l: 6.60%)

Receive 1y IRS (open: 7.12%; target: 6.50%; s/l: 7.30%)

Receive 3m NDF implieds (open: 6.30%; target: 5.70%; s/l: 6.50%)

Sell EURRUB (open: 43.40; target: 41.50; s/l: 44.00)

Overall bullish on OFZ and local bond market on monetary policy and inflation grounds

****

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Publication:Russian Banks and Brokers Reports
Date:Jul 29, 2013
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