Liquidity Strained as Banks Wary On Ruble

Russia's overnight money market rates hit historic peaks on Tuesday, and demand for Central Bank funding outstripped supply in a sign that market players are not yet convinced that the ruble's depreciation is over.

The Central Bank last week signaled the end of a 2 1/2-month-long creeping ruble depreciation that shaved a fifth off the value of the currency to adjust it to lower oil prices and the worst economic outlook in a decade.

Since then, the ruble has held well within its new 26 to 41 trading band versus a euro/dollar basket, closing at 37.77 on Tuesday after government sources said Russia plans a 900 billion ruble ($27.4 billion) capital injection for commercial banks hit by the economic crisis.

But ruble liquidity has remained strained, even though most of the corporate tax payments that boosted demand for ruble funds earlier this month have now passed -- suggesting that banks remain unwilling to change their foreign currency holdings into rubles.

"It seems banks do not yet sufficiently believe that the technical correction of the ruble rate has finished. They are sitting up to their ears in foreign currency," said Anton Tabakh, analyst at Troika Dialog.

"My feeling is this situation will last a few more weeks."

Demand at the Central Bank's repo auction has surged this month, with the regulator allocating over 600 billion rubles ($18.19 billion) per day.

This may be because banks are simply rolling over the money each day rather than converting their foreign currency to repay the Central Bank.

"Clients are waiting for now [on the ruble]," said Vitaly Andreyev, dealer at Nomos Bank.

Banks are also making the most of other sources of liquidity, with demand for five-week, collateral-free loans from the Central Bank exceeding supply threefold on Tuesday.

Mosprime overnight interbank rates hit a record 25.17 percent on Tuesday, more than 2 1/2 times higher than the rates at which the Central Bank lends at its repo auctions.

Sergei Shvetsov, the head of the Central Bank's financial markets operations department, said on Tuesday that the currency had found a certain equilibrium but is likely to remain volatile in the near-term.

While some analysts believe that the Central Bank's devaluation has taken the ruble close to fair value levels, others are unconvinced and project further weakness.

The pace of the ruble's drop to 41 versus the basket depends on movement in crude prices, said Peter Rosenstreich, chief market analyst at Geneva-based currency-trading firm ACM Advanced Currency Markets.

"We still think the ruble will continue to come under pressure and that it will test the end of that new trading band," he said. "The vast majority of traders out there think the ruble needs to continue to depreciate."

The ruble hit a record low on Tuesday of 44 against the euro after the common European currency was buoyed by better-than-expected German corporate morale.

(Reuters, Bloomberg)