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
    weiliangchang@dbs.com

     

    Eugene Leow

    Rates Strategist - G3 & Asia
    eugeneleow@dbs.com



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