Russian Fixed Inocme Daily

FX and money market

Yesterday, as expected the rouble appreciated by 13 kopecks against the dollar and reached RBL26.8441/USD (tom). With some strengthening of the dollar in the global markets after weaker than expected economic releases in Japan and continued uncertainty around Yuan, the rouble weakened today and we expect it in the range RBL26.86-26.91/USD. At the same time, the market sentiment on the rouble remains positive and it generally stays short on dollars.
In the money market, rouble liquidity remains solid, with overnight rates close to 2.5% which is not very high taking into account the biggest monthly tax payment of profit tax scheduled for today. We do not expect any serious liquidity squeezes in the coming days.

Rouble bond market

Yesterday, trading activity in the rouble bond market was rather high with the most prices edging up. Long OFZ’s rose by 10-15bp (46018, 46020, 46002), while the main growth in the corporate sector was seen in first-tiers (FSK UES, Gazprom, Lukoil, RZhD). The market was supported by the favourable situation on the Russian Eurobond market where Russia ’30 rose following US10Y, resulting in a spread reduction to 109bp from the recent 112-113bp. US Treasury debt prices grew on Thursday in nervous trade on the back of reinforced expectations that the Fed might pause its interest rate hikes in August (yesterday’s scheduled June home sales figures fell more sharply than expected).

Today, the market will keep its eyes on 2Q06 GDP figures that the Fed will take into account for its rate hike decision at the next FOMC meeting on 8-9 August.

Today, we do not expect any strong changes in the local debt market, although some liquidity squeeze due to tax profit payments and end-of-month effect could somewhat diminish interest (this morning overnight interest rates are at 2.5% which is not high for this period).

Last week, reserves increased by US$7.5bn (!) to US$262.9bn; this week they are likely to slow down

As expected, international reserves accumulation dramatically spiked last week. Reserves gained US$7.5bn (reserves totalled US$262.9bn) in the week ending 21 July 2006. This accumulation was three times higher than the 2006 average figure of US$2.5-3bn. We had expected this acceleration: market players remain very positive on further rouble appreciation and the recent appreciation of the rouble against the bi-currency basket strengthened this sentiment, increasing dollar supply in the market which was absorbed by the CBR.
In August, reserves are likely to be volatile. On the one hand, the CBR is very likely to continue to buy dollars and prevent the rapid and excessive appreciation of the rouble. On the other hand, reserves could drop on the back of the scheduled US$22.3bn prepayment of the Paris Club debt.
We strongly believe that the current level of reserves is absolutely safe (for example, gross external debt, including corporate debt, is forecast at US$286bn in 2006), making reserve fluctuations not important for economic performance. Nevertheless, we should not ignore the fact that July’s revaluation of the rouble was provoked by very rapid reserve accumulation in April-May when the CBR bought US$42bn and the consequent growth of M2 to 43%(YoY) in May. New data releases on M2 growth (M2 increased by 6% in June – which mean further acceleration of M2 growth to 44% in June 2006) look very supportive for further appreciation of the rouble as inflationary pressure becomes stronger and actual inflation in July is likely to exceed June’s modest result.

Investment implications: Reserves are very sizeable, which will help to protect the economy from any external shocks, although we expect reserves to be volatile in August for fundamental reasons. We maintain our forecast for reserves at US$270bn by 2006-end. New spikes in reserves may result in a decision to allow further rouble appreciation.