Last Friday the exchange money market didn't feel support. Since the morning dollar exchange rate exceeded a mark of 60.25 rub waiting for the decision of board of directors of Bank of Russia. After the announcement of decrease in key interest rate on 50 the ruble weakened and during some time was traded on a mark of 61.10 dollars, but soon returned on former line items. However then the price of Brent oil which by the end of the biddings fell to 52.2 dollars/barrel started putting pressure upon the market. (minus 2.1% by previous day). As a result of the resumed pressure the ruble following the results of session weakened for 3.1% concerning dollar which rate on closing constituted 61.71. Dynamics of currencies of other emerging markets had multidirectional character. In relation to US dollar the Mexican peso got stronger for 1.0%, the Turkish lira and Thai baht rose in price for 0.4%. At the same time the Brazilian real weakened for 1.5%, and the Indian rupee went down in the price for 0.6%. Raw currencies were surprisingly steady against decrease in oil quotations: concerning US dollar the Australian dollar became stronger for 0.2%, and the Norwegian krone and New Zealand dollar weakened very little, for 0.1–0.2%.

The decision in the field of a monetary policy made on Friday by Bank of Russia didn't become a surprise and corresponded consensus forecast of participants of the market and to our expectations. Considering the insignificant decrease in key interest rate undertaken by the regulator, which followed it sharp weakening of ruble as we believe, only reflected a spirit of participants of the market. We expect that this year the Bank will continue a rate on mitigation of monetary policy money market, but lower rates that will keep high carry in ruble. With respect thereto oil prices, vneshnedolgovy payments and term of increase of a rate of U.S. Fed for federal funds will be the key factors determining dynamics of the exchange rate of ruble in medium-term prospect. In particular, in our opinion, present dynamics of ruble exchange rate is based on continuation of correction of an oil price of Brent to a mark of 50 dollars/barrel.

Money market: adapting for a new corridor of interest rates

Rates of the money market on Friday fell after the decision of Bank of Russia to lower key interest rate on 50, to 11.00%. On session closing the one-day rate of a currency swap departed to 10.04%, following the results of day the weighted average value made 10.81% (minus 7). Despite pressure in the exchange market, the curve of NDF fell on 20-30 – in particular, 3-month-old was closed for 12.09% (minus 24). Short rates of a cross-currency swap decreased on average on 12-15: the annual – to 11.65%, longer – only on 6–9 бп. The curve of interest rate swaps in parallel moved on 10-15, and the 3-month rate of MosPrime practically didn't change, having closed for 12.20%. Demand for the liquidity offered by Bank of Russia remained modest: banks attracted only 27 billion  within transactions one-day currency with a repo. This week the Federal Treasury plans to carry out two deposit auctions for the total amount of 250 billion. which in case of attraction in full will be enough for refinancing of the expiring budget deposits. In general, in our opinion, the situation with liquidity this week will be still comfortable as the period of averaging of allowances enters a final stage, thus banks are kept by means on corresponding accounts with a sufficient inventory. Concerning monetary policy prospects we believe that the Bank of Russia at the following meeting of the Board of Directors will leave interest rates without changes (in more detail about it read in our Friday overview "The Decision of Bank — Risks of Chilling Is More Essential than Temporary Surge in Inflation"), but rates of the money market will keep all the same closer to the lower bound of a corridor in connection with growth of expenses of the budget.

Money market: narrowing of spread of rather key interest rate

Friday session in the federal loan bond market began quite passively as participants of the market abstained from active actions waiting for the decision of Bank of Russia in the field of a monetary policy. As a result the regulator lowered key interest rate on 50, to 11.0%. This step met consensus expectations of investors and was already considered by the market which reaction to the announcement of the Central Bank, as a result, was reserved. By the end of day long releases of federal loan bond increased in the price on 0.3-0.4 software, including OFZ-26212 were closed with profitability of 10.65%. On an average piece of the curve quotation software grew on 0.2-0.3, and average yield on the market went down on 7–8. Such dynamics reflects market reaction of federal loan bond on the decision of Bank of Russia which actually ignored pressure upon ruble exchange rate from decrease in oil quotations. Federal loan bonds indexed on inflation on Friday fell in price approximately on 0.2 software, besides that the level of imputed inflation (break-even inflation), by our calculations, still constitutes about 7.2%.

Today since morning Brent oil is already traded in minus for 1.0% in this connection it is necessary to expect growth of profitability of federal loan bond at opening of the biddings. We will note that on Friday the spread of long-term federal loan bonds of rather key interest rate of Bank of Russia after the announcement of decrease in the last grew on 45 бп (to minus 85). Nevertheless carry remains negative and still significantly is beyond normal values. It is necessary to remind that in August of a meeting concerning a monetary policy won't be, and at a September meeting Bank as we expect, will take a break in a cycle of mitigation of monetary policy. The combination of negative carry and a weak price performance on oil, in our opinion, create conditions for further correction of federal loan bond with the fixed coupon. At the same time carry on bonds with the coupon attached to RUONIA rate remains positive that probably will provide them a certain support.


The money market — part of the market of lending capitals where the deposit loan operations serving mainly movement of a working capital of firms, short-term resources of banks, organizations, the states and individuals are performed generally short-term (from one day to one year).
With development of the international and credit currency relations the international money market was created (the world's largest market of money is New York, important — the markets of London, Tokyo, Paris).
Tools of the money market are bills of exchange, deposit certificates, banker acceptances. Its main institutes — banks, accounting houses, broker and dealer firms. Sources of resources are served by the funds raised by a bank system. The main borrowers are firms, credit and financial institutes, the state, the population.
The main condition of participation in market transactions — possession of liquid means.
By means of the credit mechanism of the money market transactions in the shortest terms are made. Thus by mutual provision of short-term loans liquidity of commercial banks is regulated. Also speculative transactions can be made.
The money market is closely connected with the market of the long and medium-term equities. The state uses its resources for a covering of the expenses and budget deficit. The money market — the most important object of state regulation.
Interest rates of the money market are connected with rates of other sectors of the financial market, and the discount rate of Central Bank, a rate for treasurer bills of exchange, interbank rates on day loans ("daily money") are basic for all system of interest rates.
The environment in the money market depends on the following factors:
• cyclic changes in economy;
• inflation rates;
• features of a national credit policy.
The money market reflects demand for money and their offer. The offer of money (MS) is understood as total quantity of the money which is in circulation; it consists of the aggregates M1, Sq.m, MZ.
Demand for money (MD) is created of such components:
• demand for money as currencies (business, operational or demand for money for transactions);
• demand for money as means of preserving cost (demand for money as assets, demand for reserve cost or speculative demand).
The level of the income in society is higher, the more is made transactions; the price level is higher, the more it is required money for transactions within national economy.
On a horizontal axis the amount of money supply, and on vertical — percent (the price of money) is postponed. Demand for money supply decreases with increase in percent. The it is more than a percent, the it is less reasonable to store the means in the form of cash. It is better to have them in the form of means, revenue-producing. With interest rate reduction demand for money supply increases.

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