September 20, 2019
Fed Injects Cash for Fourth Day as Funding Markets Stabilize
“The Federal Reserve added liquidity for a fourth straight day to a vital corner of the funding markets, helping further stabilize rates as investors remain concerned that fresh bouts of stress may be felt in the weeks ahead. The New York Fed injected another $75 billion Friday through an overnight repo operation. That followed operations of the same size on Wednesday and Thursday, and $53.2 billion on Tuesday. The actions, commonplace in pre-financial crisis times, temporarily add cash, with the Fed taking government securities as collateral. Wall Street bond dealers submitted about $75.6 billion of securities for Friday’s Fed action, lower than the previous two days’ levels. Many analysts are already predicting the Fed will do a similar operation on Monday. “Given it was slightly oversubscribed and the rate was at 1.8%, its shows the Fed is playing an important role in calming the market and needs to keep doing these operations,” said Priya Misra, head of global rates strategy at TD Securities in New York. “But overall, these operations are only a temporary fix, it’s a band aid. The big fear is that around quarter-end, when dealer balance sheets are more constrained that these Fed operations won’t work as well anymore.” The latest addition of liquidity — with the Fed making clear it’s ready to do more as needed — follows the Federal Open Market Committee’s move Wednesday to reduce the interest rate on excess reserves, or IOER, by more than their main interest rate — all attempts to quell money-market stresses. The operations have calmed the funding market, with repo rates declining to more normal levels after soaring to 10% Tuesday, four times last week’s levels. Overnight general collateral repurchase agreement rates remained steady Friday, trading around 1.90%, according to ICAP. The Fed effective on Thursday was 1.9% — within the central bank’s target rate range of 1.75% to 2%. That compares to 2.25% on Wednesday, and 2.3% Tuesday — when it busted above the top of the Fed’s previous target band, before policy makers lowered borrowing costs on Wednesday.”
Pound Rally Fizzles as Ireland Puts Dampener on Brexit Hopes
“The pound pulled back from a two-month high as Ireland warned a Brexit deal is not close, calming a rally sparked by optimism from European Commission President Jean-Claude Juncker. The currency halted two weeks of gains after Irish Foreign Minister Simon Coveney said the “mood music” has improved yet there is still “quite a wide gap” between the U.K. and European Union. Sterling had been closing in on its longest run of weekly increases since January after Sky News reported Thursday that Juncker thinks a deal can be reached by the Oct. 31 deadline. Pound traders are hanging on every word from both sides as they try to ascertain if an economically damaging crash-out scenario can be averted. Negotiations around Brexit have been stuck for months with little sign of movement as the October deadline looms for the U.K. to leave the EU. “The pound could have more to gain on the upside over the short-term,” said Derek Halpenny, the head of markets research at MUFG, adding the bank remained skeptical until it hears supportive comments from Brussels on any U.K. proposals. “We certainly have to acknowledge there might be something in this but equally this could so easily be much ado about nothing.” The pound was down 0.2% at $1.2501 by 13:12 p.m. in London, after touching the highest since July 15. It’s the best performer among peers this month, with a 2.9% rally. The positive noise around efforts to forge a deal for now is just rhetoric that can be interpreted either way. Juncker himself said Wednesday that a risk of a no-deal Brexit was “palpable.”’ It’s “really unclear as to where things actually stand,” said Brendan McKenna, a foreign-exchange strategist at Wells Fargo Securities in New York. Sterling could rise 5% if a deal is clinched, or tumble to parity with both the dollar and the euro if the U.K. crashes out of the bloc, according to Shamik Dhar, chief economist at BNY Mellon Investment Management.”
China’s Plan for the Yuan Could Backfire in Any Crisis, Strategist Says
“China’s currency-swap lines with nations spanning the globe, designed to bolster the international role of the yuan, could backfire badly in a world crisis. So argues Mansoor Mohi-uddin, a senior macro strategist at NatWest Markets in Singapore. The danger is that foreign central banks would exchange their currencies for yuan with the People’s Bank of China, then dump those holdings for dollars if a crisis hits, he wrote in a research note Friday. “This would exert downward pressure on the yuan’s exchange rate against the greenback at a time when the PBOC would also likely be trying to shore up sentiment on its own currency,” Mohi-uddin wrote. Swaps “may be the yuan’s weakest link in a major financial crisis.” Such an exchange would highlight how, though the yuan is now officially a reserve currency — with the imprimatur of the International Monetary Fund — its global appeal is well short of the dollar’s. China’s currency is used in 4.3% of global foreign-exchange transactions, against the dollar’s 88.3% share, according to the Bank for International Settlements. China has set up currency swap lines with dozens of countries to grease trade and, if needed, to act as an emergency backstop. NatWest calculates the total as a potential 3.7 trillion yuan ($523 billion). Unlike the Federal Reserve’s swap lines with the euro region, Japan, Canada, the U.K. and Switzerland, the PBOC’s arrangements don’t require approval for activation, according to NatWest’s analysis. The PBOC didn’t immediately respond to a faxed question on the issue of approval to tap the swap lines.”
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