Trade deal still elusive; Fed's plan to handle repo spike

Muted expectations for China-US trade deal. Further details on Fed’s plan to handle repo squeeze awaited.
Wei Liang Chang, Eugene Leow10 Oct 2019
    Photo credit: AFP Photo

    FX: Trade deal prospects remain dim
    US-China trade negotiations have started in Washington. China has reportedly offered to raise its US soybean purchases to 30m tons for the year starting Oct 1, but this alone is unlikely to catalyse a breakthrough. The US has previously stressed that it wants a comprehensive trade deal covering a range of issues including IP protection and market access, which remain key points of contention. The USD is largely listless as markets await the outcome of the talks, with positivity in the US session dampened again after news broke that little was agreed at the deputy-level pre-negotiations discussions.
    In Asia, Moody's placed Vietnam's Ba3 rating under review for a potential downgrade yesterday, citing "institutional deficiencies" that had resulted in delayed payments on government debt obligation. Moody's has noted that Vietnam's rating remains underpinned by strong growth. Thus, the issue is not so related to Vietnam's ability to fulfil its debt obligations, but to fulfil those obligations on time and reliably. We note that foreign bond positioning in Vietnam is very small, and so the rating review is not likely to result in notable outflows or VND weakness.
    Rates:  Fed’s plan to handle repo spikes                   
    Fed Chair Powell indicated that he would grow the Fed’s balance sheet soon and T-bills will be the likely instrument of choice. To recap, the Fed briefly lost control of overnight USD interest rates in September when the repo market seized up. To provide short-term liquidity, repos (term and overnight) have been utilized and will be in place through to November 4 to assuage funding concerns. We recently wrote on this issue (see here) and expect further details to be made available by the next FOMC meeting in late October.

    In terms of asset purchases, the amount and pace bears watching. Judging from the size of the balance sheet expansion (about USD 190bn since end-August) thus far, we suspect that the Fed could buy about USD 150-200bn of bills.These purchases are likely to be frontloaded over a few months to bring the amount of reserves back to equilibrium. Subsequently, the pace of balance sheet expansion would likely slow to match reserve needs as GDP grows. We think that a standing facility is also likely to be put in place to handle seasonal demand for liquidity.

    Chang Wei Liang

    Credit & FX Strategist


    Eugene Leow

    Rates Strategist - G3 & Asia

    The information herein is published by DBS Bank Ltd and PT Bank DBS Indonesia (collectively, the “DBS Group”). It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or finan­cial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.

    DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong.

    PT Bank DBS Indonesia, DBS Bank Tower, 33rd floor, Ciputra World 1, Jalan Prof. Dr. Satrio Kav 3-5, Jakarta, 12940, Indonesia. Tel: 62-21-2988-4000. Company Registration No.