EM Asian currencies likely to advance if US and China make concrete progress in renewed trade negotiations, says Scotiabank

The emerging market Asian currencies are expected to advance if the US and China make a concrete progress in the renewed trade negotiations, remaining susceptible to the headlines in the coming weeks till the Washington talks due in early October, according to the latest research report from Scotiabank.

According to the USTR’s office, deputy-level US-China trade talks will start in Washington on Thursday.

The Fed voted 7-3 to lower the target range for the fed funds rate by 25 bp to 1.75-2.00 percent. The US central bank also cut Interest Rate on Excess Reserves (IOER rate) and Overnight Reverse Repo (O/N RRP) rate by 30 bp each to 1.80 percent and 1.70 percent respectively for maintaining the interest rate target range, with effect from September 19.

The US central bank is facing increasing extent of the split over the policy outlook. Seven of 17 officials penciled in one more rate cut this year. The other 10 were split evenly between those who thought the new target range of 1.75-2.00 percent would be appropriate and those who thought the target range should be raised back to 2.00-2.25 percent by the year end, the report added.

Fed Chairman Jerome Powell said at the press conference that the rate cut is aimed at "providing insurance against ongoing risks," and the US central bank may resume organic balance sheet growth earlier than thought.

However, the Fed’s hawkish stance failed to convince the rates market. Fed Funds Futures are still pricing in a 76 percent chance of one more 25 bp rate cut in Q4 2019. The effective fed funds rate (EFFR) that has been staying above the IOER jumped to 2.30 percent Wednesday, breaching the upper bound of the target range for the fed funds rate.

The New York Fed will conduct an "overnight repo agreement operation" for a third straight session on Thursday to provide up to an aggregate amount of USD75 billion to the banking system, after injecting USD75 billion and USD53 billion respectively on Wednesday and Tuesday to calm US money markets.

"It indicates the Fed may finally need to re-expand its balance sheet in addition to conducting the overnight repo operation to raise the reserve balances, with the aim of ensuring the EFFR remaining within the target range. The move could weigh on the dollar in general, in our view," Scotiabank further commented in the report.