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What is the appropriate way to handle the fact that short dated deposit rates implied from NDF markets using parity formula are usually distorted, sometimes significantly, due to the inherent spread between the on-shore and off-shore yields. This makes the short end of the curve for some currencies pretty much non-sensical. Just wondering what the common approaches are. I would like to see a curve that does not necessarily look as smooth as the one built from the actual On-shore deposits, but at least something with a nice and smooth tapering off at the short end.

I would imagine if you factor in an appreciation in the exchange rate then you can get what you want.

The thing is that I need to get a yield curve that looks reasonable. And I have to get it from NDFs. So what is a standard practice - to just extrapolate down from the first good point? Or something fancier than that?