This page has been archived and commenting is disabled.
The Sellside Reacts: "17% Rate Hike Not Enough" According To Citi, JPM; Goldman Positive: "Removes CBR Uncertainty"
Two short hours ago Russia shocked everyone with an unprecedented rate hike sending the nation's various interest rates some 650 bps higher. Well, according to the initial sellside responses, as shocking as the move was, it is not nearly enough.
Here is Citi:
Many market participants are looking at Russia’s hike from 10.5% to 17.0% and saying “wow”.
However, speaking with one of our senior RUB traders, the move is likely not aggressive enough for the medium-term. “Hiking the key rate to 17.0% is not enough to get a hold of a currency that can drop 10% in one day,” he says. “On top of that, the FX repo size needs to be much larger than it is at the moment…however, the hike might give RUB a few days of breathing space.”
One wonders just which "chatroom" Citi's FX traders decide what the fair value of the Rub(b)le should be.
And while we wonder, here is JPM which already appears to have exchanged notes in chatroom XYZ with Citi:
The rate hike occurred after today's 10% depreciation of the RUB despite attempts by the CBR to intervene earlier in the day. The decision was aimed at "limiting substantially increased ruble depreciation risks and inflation risks" according to the CBR. This emergency move suggests to us that household deposit dollarisation had increased significantly (official October data had already suggested dollarisation re-accelerated again). Tonight's large rate hike should in the short term help to slow retail dollarisation demand. However rate hikes do little to help the underlying demand for USD from corporates and banks who continue to front load their demand in order to apy their FX debt payments further down the line. With limited access to USD funding markets and oil having yet to find its bottom, the perceptions of local banks and corps on RUB continues to be negative, fuelling this hoarding behavior. In this context, there is a real possibility that even such a significant rate hike may not be enough in the medium run to stem RUB depreciation. The central bank in our view needs to announce a package of measures alongside rate hikes which also aim to lam local fears of USD scarcity. This will most likely involve making available a sizeable amount of FX reserves (we have suggested around USD100bn in our piece) through a combination of deposits in state banks and the CBR's existing repo facility. The CBR however continue to be unwilling to commit their FX reserves, with their focus still primarily concentrated on defending the sovereign balance sheet. As part of a package of measures, the CBE may also look to cap local bank open FX position limit down from the current 20% of capital as well as raise FX RRRs to help stem deposit dollarisation. Further pressure can also be put on corporates to convert their FX proceeds faster.
Bottom line: expect the market to react positively to the rate hike in the short run, but further measures are needed from the CBR for us to turn more bullish on RUB in the medium run, particularly in the absence of improved geopolitical risks and higher oil prices.
But Goldman is less negative on the move: "The decision clearly removes the uncertainty over the CBR's strategy that in our view was a major driver of the recent Ruble volatility and hence is positive. "
What happened: The Ruble traded above Rub72 vs. the basket and for the first time sharply outside our fair valuation metrics at current oil prices. Similarly the Ruble price of oil, which underlies next year's budget (Rub3700/bbl) and is closely tracked by the market, moved to its highest level yet. This was despite the oil price being fairly stable on the day and no significant news around other risk factors. The CBR responded to the sharp Ruble move post Moscow trading hours by raising its key rate from 10.5% to 17%, raising the key rate spread for loans against non-marketable collateral from 25bps to 175bps meanwhile extending their maturity by up to 18 months, though the wording of the CBR's publication is quite unclear on the latter point. Additionally the limit for the 28-day fx repo auction was raised from USD1.5bn to USD5 bn while the CBR also announced that it will hold the 12-month fx repo auction on a weekly basis. This policy response of raising the repo rate to fight the Ruble is against our expectations of the CBR likely to allow much higher interest rate volatility through tight liquidity management and we put our forecasts for rates, growth and inflation on hold and close our conviction views of being constructive on local fixed income assets and Russian credit. The decision clearly removes the uncertainty over the CBR's strategy that in our view was a major driver of the recent Ruble volatility and hence is positive. The key will be, to what extent the market believes that this strategy is credible given the likely impact on growth and the funding cost of the banking sector.
Why has the Ruble been under pressure? Fundamentally the Ruble is under pressure from sanctions and lower oil prices, and we have laid out our fair value model here (see CEEMEA Economics Analyst 14/35, 17 Oct. 2014). In our view the Ruble has recently been under pressure mostly from expectation-driven local flows. While the sanctions have been a major factor in the weakening of the Ruble earlier, we think fx liquidity in Russia is now ample despite the sanctions. This is very different from 2008/9. The banking system remains a sizeable international creditor (unlike in 2008) and even the corporates' net short-term external debt position is sizably positive, i.e. they hold more fx cash than required for debt repayments in the next year. Not surprisingly onshore short-term fx rates are close to zero. Instead, the private sector is continuing to short the Ruble with expectations heavily driven by falling oil prices. In our view this ultimately required decisive action from the CBR to raise the cost of these flows.
What triggered the recent sharp sell-off?: In our view the destabilization had been triggered by confusion about the strategy of the Central Bank. Uncertainty about where the oil price will ultimately stabilize remains high and hence the CBR can in our view not aim at stabilizing the level of the Ruble. However, it needs to ensure that excessive Ruble volatility does not destabilize expectations and potentially the financial system.
We thought this was best achieved by keeping Ruble liquidity very tight through unsterilized interventions. The cost of that strategy would have been to accept significantly higher short-term interest rate volatility, something that the CBR worked hard to dampen in the last few years. The alternative in our view and the one ultimately now chosen by the CBR has been to raise the key rate to a level where it becomes prohibitively expensive to borrow. We thought this would have been the less preferred option due to the economic costs likely to be involved and the pressure this puts on a weak banking system. Another possibility was clearly some kind of constraints on the ability of domestic agents to invest into fx. However, the latter had in our view been credibly ruled out by the authorities and this assessment is confirmed by today's rate decision.
Against the above, the CBR's signals had been difficult to read. The CBR raised its key rate last week by 100bps, as before arguing that it would use the key rate to stabilize inflation expectations. This was largely in line with our thinking, though we had only forecasted 50bps, but clearly far less than what short-term market rates were pricing.
We had forecasted that the CBR at the same time would signal very clearly that it would use liquidity measures to stabilize the Ruble instead and potentially widen the interest rate corridor. However, the CBR did not give any clear guidance apart from the fact that it extended the quantity restriction on the fx swap facility forward in time (the only lending facility that has essentially an almost unrestricted collateral pool, given the amount of fx held by the banks).
With access to the fx swap facility restricted, the way to manage liquidity would have been to allow the restrictions set by the amount of eligible collateral in the repo operations to become binding. This would have easily happened if the CBR intervened in the market without adding to the Lombard list. However, instead the CBR added a large private placement of bonds by a Russian corporate to its Lombard list, expanding the pool of collateral by close to 10% on our numbers. This effectively seemed to signal that the CBR essentially wants to restrict interest rate volatility and instead is willing to accept sizeable fx volatility, which the market duly delivered today.
Today's rate decision now signals that the CBR is willing to use the key rate to limit Ruble volatility while keeping interbank rates close to the policy rate, i.e. it is the most orthodox approach to monetary policy. This will in our view lead to a sharp sell-off in the local bond market, which is anchored by the key rate and where the yield structure depends on expectations of the future path of the key rate. While arguably today's sharp move should flatten the curve or even invert it, this largely depends on the market's perception of the credibility of the move.
Why such a large hike? A 650bps hike is very large by any metric and is more than the market expected (short-term rate expectations had fallen back to 11-12% from above 17% post last week's rate decision judging from the FRA's. Thus the decision is largely in line with what was priced in prior to last week's rate decision. We also believe that given the limited transmission of policy rates to deposit rates in the banking system, any interest rate based response to the Ruble needed to be outsized to have a meaningful impact on the attractiveness for resident households and corporates to hold Ruble assets rather than fx.
What are the risks? Today's decisive rate hike clearly removes the uncertainty about the CBR's strategy and signals that the CBR is now willing to defend the stability of the Ruble. The decision should also alleviate some concerns about the political independence of the Bank. The risks now mostly are about the ability of the economy and most importantly the banking sector to withstand this shock to their funding cost. Unlike in 2009, a far larger share or in our view around 10% of the banking system's balance sheet is now linked to the key rate, thus today's rate decision has a meaningful impact on the funding costs of the banks. While much of their assets are at floating rates, the impact on their bottom line will in our view be sizeable either directly or through a deterioration in asset quality. For this reason, in our view, the impact of this large emergency rate hike on Russian credit spreads could ultimately prove to be negative.
So get to work, Mrs. Russian Chairwoman, unless somehow the ex-KGB spy is prepared to make good on his recent threat to personally tear off the heads of any and all FX speculators found to be short the RUB.
»
- 31407 reads
- Printer-friendly version
- Send to friend
- advertisements -
My avatar is a girl so she's no good at math. I'll tell her to fix it but I can't guarantee that she will.
LMAO.
dipstick
Questions? Just how levered are those on the short side?... cos I'm thinking now's a great time to take advantage of a 17% rate and appreciation of the currency.
That's what I truly do not understand. Why keep dealing with the US? Screw'em! It's not like they buy a lot of Russian oil/nat gas. Anybody want some? (It's cold, right EU?) Pay in your currency or ours. Fuck Uncle Sam!
Like a car that hits black ice, it's all out of Vlad's control.
All he can do right now is shit his drawers.
why do you shit in your panties when people buy silver?
Bob, almost all my money's in silver, you brainless piece of shit! :-)
If most of your investment capital is in Silver then it is you that is brainless.
Silver performs terribly in Deflationary Meltdowns. In 1933 I could trade the 1/5th Ounce of Silver in the US Silver Quarter for ONE Ounce of PURE SILVER. They were giving it away.
The price of Silver was so damned depressed in the DEFLATIONARY DEPRESSION that the US Government had to step in and buy it as the depressed price was DEBASING THE VALUE OF THE COINAGE.
Silver is going to go to $9/ozt before this shitstorm of deflation is over. Gold will see $1000.
The path to Depression has not yet CRYSTALLIZED. Deflations may precede Hyperinflations but a Hyperinflation is not always the result of a Deflation.
It is better to have a substantial amount of Gold. Gold maintains or APPRECIATES in value (PURCHASING POWER...NOT NECESSARILY IN PRICE) in both Deflations and Hyperinflations. Silver is SPECULATIVE.
You have no business in the PM Markets. Get out you fucking speculator...what a weak hand.
Or in 1933 a pound of gold could purchase a good car, and in 2014, a pound of gold will buy a good car. Apples, oranges, it all depends on your point of view.
You're short Rubles. Aren't you?
How much is this costing you?
What JPM and Citi WANT is for Russia to intervene by purchasing the extreme ruble positions that JPM and Citi have (and now want to sell). By raising rates and NOT intervening, there is NO ONE to buy these over-leveraged positions from JPM and Citi! This is just an attempt by Citi and JPM to try to get out the very small barn door before the rest of the herd stampedes out the door.
ON the other hand, consider that JPM and Citi might be big players in the cabal coordinating the multi-pronged attack on Putin and Russia.
Of course they are, and they are just talking their book. One or two 'surprises' by the russian CB and watch JPM and Citi squeal as they get their balls short squeezed.
It would be an "act of war" if they got caught on the wrong side of a trade; and sacriledge too as they are doing god's work, after all.
More than that. The 6% bump would have been way outside their "risk projections". Next time they do it they're going to have to widen potential losses a lot.
Even giving Citi and JPM the benefit of the doubt (not that I believe them) -- this move gives Russia more breathing room and buys them some time. It makes it that much more likely that Nigeria, Mexico, Venezuela and the US Shale Oil debtholders (held by the TBTF banks!) will go belly up before Russia.
Sadly, the credit worthiness of the US is far less than Russia - other than the capacity to print moar fiat as the global reserve currerncy, and blow sh*t up, our default risk is hardly worth a negative interest rate and is soon going to meet reality in the same way a bug meets the winsdshield of a car doing 65 mph... splat.
I just wonder how many bad interest rate deriviatives and Credit swaps Im gonna have to pay for in the morning. from the sounds of it citi and JPm have probably levered their entire fraudulent balance sheet 1000x.
By the way, You geniuses at JPM and Citi do realize that this can be considered an act of war? sure you do.
Thanks congress. luv ya guys. kisses.
What will be enough for the bankers? War. That is what they want.
thats one of their big moneymakers
USDRUB down 8% and falling after the announcement -- maybe Citi and JPM were wrong???
Vlad needs to do the honorable thing and slit his own throat. That'd solve a lot of problems.
Vlad, can you be the patriot that Russia needs right now?
Could you help us out and slit your own throat?
That would solve one problem.
it's the only attention he gets. w/o the down votes he'd be less than he already is.
a real sicko
Let's put our heads together and brainstorm a way that'll buy Vlad 15 minutes of time, okay?
<crickets>
Okay, sorry Vlad....
You're a terrible person/software.
Perhaps the rate hikers got it all wrong, and should have cut the rate to stimulate domestic growth in the Russian economy. Instead, they're going to remove capital from most domestic sources of demand, and crater their economy with the high rate nonsense.
If this fails Vlad will just have to kill some banksters. GO VLAD!
Look, everyone's a loser. Russians can probably deal with it better than Americans and Europeans.
Bankers are expert theives but they rarely think about anything else except MOAR. Let them ponder on why, someday soon, their sky gets really bright and then their skin melts off. There will be a lot of thinking in those final few seconds.
Oh, C'mon now!
It doesn't really melt, it puffs up and toasts a nice blistery brown, at least until the shock wave rolls in and knocks it loose.
Not that that will happen but if I were betting, I would be long on Russian ICBM fuel.
According to the Russian CB, Russian external debt was $678.4B in Jul 2014:
http://www.tradingeconomics.com/russia/external-debt
Also according to the Russian CB, Russian foreign exchange reserves were $419B in Nov 2014:
http://www.economist.com/blogs/freeexchange/2014/12/russias-foreign-exch...
(Reserves are probably less now.)
The question is: how much Russian oil production was financed by foreign loans? It is true that Russian labor costs are in rubles, but it only helps so much for a Russian oil company that needs to repay a lot of foreign debt.
Also, workers have been known to go on strike and demand higher wages when inflation rises but their salaries don't.
The other important question is -- if you are a TBTF bank HOLDING that Russian external debt -- do you really WANT to see Russia default? Who really has more power -- the guy who has the money or the guy who lent him the money?
hmmmm $676 Billion Russian debt vs USAs $17 TRILLION? watch Putin Laugh all the way to the bank
And when those companies cut oil production?
Like duh, How else would one expect Citi and JP to react ? They're trying to stay out of bankruptcy with their huge derivative mess. What exactly are these experts qualified in doing other than producing some theoritical central planning BS that assists their manipulations ?
Why do people need Wall St. and the banksters to exist in this world ? A medium of exchange is beneficial and useful, but what it is and who controls it are a couple underlying question ? Currency is not money.
Allow me to control the currency of a nation and I care not who makes its laws.
Well, Jamie Dimon should breathe a sigh of relief this week. He just got Congress to guarantee $300 trillion of gambling debts - er, derivatives, as part of the government funding bill. So Citi and JPM balance sheets should be a little plumper right about now.
Huh?
Ok were do we line up to get the new Russian world reserve currency again?
I hope it will be good.
if we can rise rates to 17% than it's mean - our economy is healthy, USA, EU and Japan can't rise rates from 0-
Not necessarily. It will crucify anyone shorting the currency though.
Putin tells the banks to subsidize his people when NATO attacks their savings. Logic rules!
Why they do not introduce capital controls?
the same way Malaysia did it. cut the outflow.
because CBR is following Washington consensus and acts as resources colony should act
Yeah, Shitigroup and your shitty dollar can't even afford 1% rate hike. So STFU. I won't piss on the dollar even it's on fire.
Putin is Paul Volcker?
Gotta love the Currency Wars. Don't know who is going to win, just know everybody dies.
which means all of them. As instructions are in place to punish those pesky Ruskies. Again, DC will fail miserably and have their arse handed to them. Like all of their recent clandestine ops.
Russia has a low birth rate, demos not looking good.
No it's going up since several year now, meanwhile US is a factory at breading idiot and immigrant.
Russia has a low birth rate, demos not looking good.
I believe Russia learns the lesson from losing the Cold War and they are stronger and smarter. The west is getting arrogant and weaker.
“That which does not kill us makes us stronger.”
–Friedrich Nietzsche
most orthodox approach to monetary policy.
and the most appropriate approach for a resource colony
So why does russians convert their money to hated western dollars? Huh? Anyone? Why do they harm their own economy? Anyone? Why Russians doesn't trust their money, their economy? Doesn't they trust their goverment also?
Why russians loves US dollars so much?
russians do not trust their own government because it is corrupt and is ready to flee to the west with all the secret bank accounts in the west (recall Cyprus bail in were many russian oligarchs got caught?)
Merkel urges Bulgaria to seek new talks with Putin on South Streamhttp://www.reuters.com/article/2014/12/15/us-bulgaria-gas-southstream-id...
(Reuters) - German Chancellor Angela Merkel backed Bulgaria on Monday in its bid to seek new talks with Russia about the South Stream gas pipeline after Moscow shelved the project this month in favor of an alternative link via Turkey.
The EU, at odds with Moscow over the Ukraine crisis and keen to reduce its energy reliance on Russia, had raised objections to the $40 billion South Stream pipeline, which was to run under the Black Sea and enter the EU via Bulgaria.
Critics of the plan said they believed it breached EU law, but some EU member states saw the pipeline, which would bypassUkraine, as the best way to secure their own gas supplies and economic interests and still hope it can be revived.
US Satanic Evil Bankers better be careful with PUTIN trying to destroy a country by destroying it's currency is an act of WAR. PUTIN is capable of destroying the US dollar with one NUCLEAR STRIKE on wall street.
Question I want to know is this all an attempt to get Putin to fully committ to a formal ground invasion with the goal of completing land bridge & taking Odessa to distract the plebs and rally his citizens. It gives NATO and the US the true bogeyman they are looking for and more free reign in intervene there militarily.
I wonder if the currency moves are also punishment for the Russia / China deals which were NOT priced in dollars.
Putin please just use a tacticl nuke on JPM, GS, Citi, Blackrock, Citadel, etc and this can all end.
PS: Short their stocks before you nuke em!
Go read the post Asian Crisis analyses (some even from their ex Central Bankers). One lesson these countries learnt was to use your reserves sparingly to defend your currency. Let the currency go. CBR learnt this lesson well in their ongoing actions.
Then was also an age of IMF Power and the Washington Consensus that impose disciplinary power on peripheral nations with the US as the Center. This has now changed, IMF has no teeth and US is indebted.
The consequences will have to be borne by these international banks with their Russia counterparty risks. It is Citi and their likes who have ignored the lesson learnt by emerging nations OR their excessive bets against the Sovereign Risk. (There are much brighter guys out there in the markets who have not followed Citi). Hence, Citi's pontification that they think they can change market direction.
If this worsen, the contagion momentum shall rise with Citi right in front. Safe to say, that unlike a more fast footed GS and others who have hedged, Citi is or has to scramble for the hedges at higher costs.