Rates Weekly - October 21, 2020

> Ruble liquidity: Due to banks' caution, ruble liquidity remains ample and will strongly push O/N rates lower after month-end tax payments. Over the last week, the banking system saw a considerable liquidity surplus after banks borrowed R0.6 trln from the CBR via repo. However, the RUONIA mostly traded around the key rate, as demand for liquidity remained high - likely ahead of the payment of R422 bln in Sber dividends on Monday. So far this week, despite the significant liquidity surplus, banks have remained cautious and their demand for liquidity remains elevated ahead of another potential R350 bln placement of OFZs today and about R1 trln due in taxes next week, mainly on Monday. Against this backdrop, the RUONIA should stay near 4.15% through this week, but it could edge up a bit next Monday to 4.25%. Meanwhile, at the end of October and beginning of November, budget funds will be spent, and the liquidity surplus in the banking system could expand significantly. But as the end of the current reserves averaging period nears, demand for liquidity should steadily fall. Thus, after October 28, when the tax payment period ends, we think O/N rates could come under considerable pressure and drop below even 4%, despite CBR fine-tuning deposit auctions.> FX liquidity: FX liquidity set to receive a short-term boost, followed by a gradual improvement. Last week, the O/N basis fluctuated around the -35 bps mark, which is still rather low. However, FX liquidity could be set to expand by $2 bln due to a recent Eurobond placement, which would lift the O/N basis by 15 bps to an average of -20 bps. Settlement will take place next Monday. So short-term FX liquidity is set to improve significantly, and the situation should continue to improve into the year-end and in 1Q21 in particular, given the seasonally strong current account during the first quarter and a moderate external debt redemption schedule. We therefore recommend paying 1y basis at -75 bps, which we expect to recover to minus 40-50 bps over the next few months.> OFZs and rates: R320-360 bln to be placed at OFZ auctions today. Today, an 8y floater, 5y nominal and 10y CPI linker will be offered. Demand for the latter two will most likely prove weak, while the floater placement could reach as high as R350 bln. At this Friday's CBR meeting, we expect the key rate to be kept unchanged at 4.25% and a possible cut at the next meeting, in December, to be signaled.