Flickering trade deal hopes; Fed's repo facility assuages funding concerns
We expect weak conviction to keep market sentiment volatile. Trade tensions remain the chief worry for the global economy. A China-US trade deal in October is still considered possible but improbable. There are no concrete signs that the US is ready for an interim trade deal that would lead to a tariff truce. Despite talks of progress by both sides ahead of the early October trade negotiations, US President Trump favoured a whole deal and signalled no urgency for a trade deal before the US presidential election in November 2020. Hence, it was not a surprise that the mid-rate for USDCNY has only edged, for the first time since August 26, below 7.08 last week.
Rates: Fed’s repo facility in place until a more permanent solution is introduced
The Fed will offer its repo facility (of up to USD 75bn) daily through to October 10 to tide the financial system through the quarter-end funding squeeze. 14D term repos (amounting to USD 90bn) will also be offered this week. To recap, overnight USD rates (repo, SOFR and Fed funds effective rate) spiked last week as a combination of factors – tax payments, heavy issuances and bloated dealer balance sheets – tightened liquidity significantly. With the effective Fed funds rate temporarily pushing above the upper bound, it is clear that the Fed briefly lost control of interest rates. We think that the Fed has assuaged concerns and will likely take the next few weeks to outline a more permanent solution to the funding problem.
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