Trade deal doubts return; QE-lite falls short

Weaker CNY mid-rate accompanies trade deal doubts; QE-lite has yet to assuage USD liquidity concerns
Chang Wei Liang, Eugene Leow17 Oct 2019
    Photo credit: AFP Photo

    FX: Trade deal doubts return amidst weakness in Asia

    In Asia, a weakening in the CNY fixing, coupled with Chinese threats of "countermeasures" against the US for passing the Hong Kong Human Rights and Democracy Act in the House, have weighed on Asian FX sentiment. The 25bps rate cut by the Bank of Korea yesterday, while expected, has also underscored the weak growth outlook for Asian economies. Singapore’s non-oil domestic exports released today showed another decline of 8.1% on a y/y basis, indicating  a still challenging external demand environment.

    Meanwhile, US President Trump has indicated that the Phase 1 trade deal will probably be signed during the November APEC summit, when he meets with Chinese President Xi. He maintained that China has “started buying already from the farmers”, but China now says that its ability to meet the targeted USD40-50bn of purchases will depend on a rollback in US tariffs, which has not happened. Thus, even if a deal is signed, it remains uncertain if the obligations can be fully met on both sides. This could lead to further ups and downs in trade negotiations, and jeopardize the limited agreement that has been reached.

    Rates:  Impact of QE-lite may be smaller-than-anticipated                       

    Despite QE-lite, there may still be lingering concerns on USD liquidity issues. To recap, the Fed announced that it would buy USD 60bn of T bills per month till at least 2Q20 while providing a backstop via overnight and term repos (see here). With the market sensing that Fed bill buying is on the way, the 3M TED spread (Libor less T bill) widened out to 34bps as bills outperformed. However, still-elevated CP rates and Libor warrant caution. QE-lite swaps T bills for reserves. However, it does not change the overall pool of liquid assets (loosely defined as reserves plus T bills) available for banks’ regulatory requirements. Viewed this way, the funding tightness may linger and banks may continue to tap the Fed’s repo facilities.

    There are a few ways to increase short-term liquidity into the private sector. Firstly, the Fed can purchase assets such as MBSs, corporate bonds or longer-term US Treasuries. However, this may not be palatable as it could be misconstrued as quantitative easing. Secondly, regulations on liquidity could be tweaked such that banks no longer have to hoard that much liquid assets. Thirdly, some coordination with the Treasury may be needed. If issuances are tilted more heavily towards the front of the curve, the resulting increase in bills should offset the take-up from the Fed. Overall, we think that USD funding may not be as flush as what QE-lite (in its current form) is supposed to deliver. 


    Chang Wei Liang

    Credit & FX Strategist


    Eugene Leow

    Rates Strategist - G3 & Asia


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