Tuesday, November 5th, 2024

US Treasury Borrowing Surge: Impact on Global Markets and Currency Outlook







In-Depth Analysis of Global Markets and Companies – OCBC Research Insights

In-Depth Analysis of Global Markets and Companies – OCBC Research Insights

Broker Name: OCBC Research Insights

Date: 29 October 2024

Global Markets Overview

The OCBC Research Insights report provides a detailed analysis of the global markets, focusing on the treasury quarterly refunding and various market dynamics. It highlights trends in USD rates, UST yields, and the US Treasury’s quarterly refunding documents. Additionally, the report delves into the bullish momentum of the DXY and the consolidation of EURUSD.

USD Rates and UST Yields

UST yields rebounded from intra-day lows during the NY session, continuing a pattern where USTs performed better during Asian hours. The coupon bond auctions overnight did not go particularly well, with both auctions tailing. Notably, the 2Y bond sales indirect bid was lower at 58.2% from 67.6% prior, whereas the 5Y bond sales indirect bid increased to 76.4% from 70.3% prior, reflecting some demand when yield moved to a higher level. Bearishness in USTs may persist into the US elections due to tight liquidity and high estimated net marketable borrowing for Q1-2025. The report foresees the 10Y UST yield’s near-term upside at 4.35-4.40%.

US Treasury Quarterly Refunding Documents

The privately held net marketable borrowing for Q4-2024 was revised down by USD19bn to USD546bn, mainly due to a higher beginning-of-quarter cash balance partially offset by lower net cash flows. However, the US Treasury plans to borrow a net USD823bn in Q1-2025, which is on the high side of expectations. This borrowing is partly to build up the cash balance from an estimated USD700bn at end-2024 to an estimated USD850bn at end Q1-2025. The report also notes that USD75bn of the borrowing in Q1-2025 is due to SOMA redemption. The borrowing needs, netting out the expected change in cash balance, would be USD673bn. Details on individual auctions are to be announced on Wednesday.

DXY: Bullish Momentum Fading

The USD rally paused overnight as markets took stock of the 4% rally in DXY since end-Sep. With a busy two weeks ahead, including JOLTS job openings, consumer sentiment, ADP employment, core PCE, and NFP before the US elections and FOMC, the report anticipates two-way trades in USD. The DXY was last at 104.23, with daily momentum remaining bullish but showing signs of fading. Support levels are identified at 103.80, 102.90/103.20, and 101.90, while resistance is at 104.60 and 105.20.

EURUSD: Consolidation

EUR continued to trade near recent lows amid broad USD strength, softer EU data, and dovish ECB speaks, leading markets to price in more dovish expectations. The risk of a Trump outcome also poses a threat of a 10% tariff on all US imports, which may undermine EUR. However, with much negativity already priced in, the report cautions for the risk of a rebound if EU data surprises to the upside. Key data to watch includes 3Q GDP and CPI estimate. EUR was last seen at 1.0810, with momentum remaining bearish but showing signs of fading. Resistance levels are at 1.0830, 1.0870, and 1.0910/30, with support at 1.0780 and 1.0740.

JPY Rates

The report expects another 10-15bps of policy rate hike before year-end, although it may not be delivered this week. The September jobless rate edged down to 2.4% from 2.5% prior, with the job-to-applicant ratio edging up to 1.24 from 1.23 prior. The labour force expanded by 180K from a year ago, with the female labour participation rate at 74.8%. The BoJ previously noted in its July edition of Outlook for Economic Activity and Prices that it will become more difficult for labor supply to increase, with labor force participation of women and seniors having advanced to a high degree thus far. This development is leading to increased tightening of the labour market and is likely to sustain wage growth. The next support for 10Y JGB is seen at 1.09% and then 1.12%.

USDJPY: Run-Up Looks Stretched

USDJPY remains better bid following LDP’s first loss in more than a decade. The coalition needs to find partners, which may take a while, resulting in a hung parliament that may face challenges passing policies. Uncertainty may complicate fiscal-monetary policy and weigh on JPY in the interim. The BoJ meeting is likely to be a non-event as policymakers are likely to hold off rate increases until there is greater clarity with government formation and economic policies. The USDJPY was last seen at 153 levels, with bullish momentum on the daily chart intact but RSI showing signs of falling from near overbought conditions. Support levels are at 151.50, 150.60/70, while resistance is at 155 and 156.50.

USDSGD: Consolidate

USDSGD remains better bid, last at 1.3230 levels. Daily momentum remains bullish while RSI is near overbought conditions. Resistance levels are at 1.3290 and 1.3350, with support at 1.3190 and 1.31. The S\$NEER was last at 1.48% above the model-implied mid, with MAS maintaining the status quo on policy stance, implying that S\$NEER strength may linger and only fade at some point when core inflation eases further.

By covering these key points, the OCBC Research Insights report provides a comprehensive overview of the current market dynamics and the expected future trends, making it a valuable resource for investors and market participants.


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