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The emerging market Asian currencies are expected to rally amid accommodative external liquidity chasing regional assets, particularly if the United States and China make a concrete progress or reach a deal as is expected at the Washington trade talks set for October 10-11, according to the latest research report from Scotiabank.
In the month of October, the Fed is in no rush to lower its benchmark interest rates again amid persistently rallying core PCE inflation. However, the US central bank will likely announce plans to re-expand its balance sheet through a bond purchase agreement as early as November.
Markets witnessed stronger demand for the 14-day cash loans than overnight liquidity from US primary dealers. On September 27, the New York Fed awarded USD22.7 billion in cash loans to primary dealers via its overnight repo operation, while allotting USD49.0 billion through a 14-day term repo operation.
On September 26, the 14-day term repo operation was oversubscribed, attracting USD72.8 billion in bids even after the maximum size of the offering was doubled to USD60 billion by the New York Fed. Conversely, the overnight repo operation received just USD50.1 billion of bids, around half the USD100 billion maximum offering.
It suggests the longer-term cash loans could better calm US money markets and bring interest rates within its intended range, the report added.
On top of the New York Fed’s overnight and term repo operations, the balance sheet expansion could help raise the reserve balances and excess reserves of US depository institutions, solving the dollar liquidity problem fundamentally and ensuring the effective fed funds rate (EFFR) remaining within the target range.
The expansion would weigh on the dollar in general. If the Fed starts to re-purchase US Treasury bills/bonds at a monthly pace of USD50 billion for six months starting from either November 2019 or January 2020, the DXY Index will likely test the 90 mark, ceteris paribus, Scotiabank further noted in the report.
