Russia’s dollar drought sparks record $1.5bn of swaps

The rouble is ignoring a surge in crude prices as a shortage of dollars in Russia sends investors scrambling for the US currency.
Demand for greenbacks in the world’s biggest oil exporter drove the rouble down 0.2% this month, even as Brent surged 11%. 
According to Danske Bank, the Bank of Russia’s decision to provide $1.5bn of overnight swaps on Tuesday – the largest offering by the regulator since at least 2014 – is reminiscent of the jump in appetite at foreign-currency repurchase auctions a year ago, when problems at Deutsche Bank drove up dollar borrowing costs in Europe.
Foreign-currency liquidity deteriorated “slightly” in August due to client outflows from big banks and the conversion of rouble dividend payments into hard currency, the central bank said in a report on September 22. Those factors are still in place this month and are “temporary,” its press service said by e-mail Wednesday.
The rouble strengthened 0.1% on Thursday, set for its first advance in four days.
Causes for the dollar shortage cited by analysts and traders ranged from the ongoing ructions in the banking industry, to imbalances caused by the Finance Ministry’s recent $3bn Eurobond swap, to the $2.1bn of corporate debt payments coming due this month.
Sberbank CIB analysts Tom Levinson and Yuri Popov: “We think this volatility is a result of temporary liquidity shortages due to the settlement of the Finance Ministry’s Eurobond swap deal. Although the situation will stabilise, FX liquidity conditions are rather tight, keeping implied rates at a quite low 7%”.
Raiffeisenbank analyst Denis Poryvay: Sees cost of FX lending increasing 25-50bps by December. Widening of spreads between MosPrime and FX swap is due to external corporate debt and dividend payments, which could have led to an outflow of FX liquidity from some banks. “The next peak in external corporate debt payments is in December, which we expect will lead to an increase of FX liquidity on the local market.”
Rosbank analysts Yury Tulinov and Evgeny Koshelev: Surge in swap demand keeps them “cautious about the state of the FX liquidity market”. “Markets right now are underestimating the resolve of the US regulator regarding the tightening of interest rates, which could create additional pressure during the transition from the third to the fourth quarter, when financial institutions around the world extend short-term debt payments”. They don’t exclude that if demand for liquidity persists, the central bank may resume foreign currency repo auctions.
Danske Bank economist Vladimir Miklashevsky: “Otkritie and B&N Bank, which are being bailed out by the central bank, might have a large need for FX funding, which could lead to unpredictable moves on the market. 
We link this to a shortage in FX funding, which has been problematic and extremely expensive for local banks. We expect the situation to worsen by end-2017, as local banks are seeking dollars through currency swaps and are ready to devalue the rouble in order to receive dollars”.
UFG Wealth Management’s investment department head Aleksei Potapov: “There’s a local deficit of FX liquidity due to the high deficit of the balance of payments, which appeared during the summer, and due to the peak of corporate external debt payments in September and December. In August and partially in September these factors were counterbalanced by high foreign inflows into local OFZ bonds, “however, currently, this support has been exhausted”.
Gazprombank strategist Dmitry Dolgin: Globally, there’s a temporary increase in demand for dollar liquidity, which regularly occurs at the end of the quarter. 
While the normalisation of Fed’s policy has a limited impact on Russian assets due to high real yields, “it can’t be ruled out that amid the contraction of the current account, the significance of global investment flows for the local FX market may increase”.

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