More Fed rate reductions, re-expansion of Fed’s balance sheet likely to weigh on dollar in the medium term, says Scotiabank

More Fed rate reductions and the re-expansion of the Fed’s balance sheet would generally weigh on the dollar in the medium term, according to the latest research report from Scotiabank.

China’s onshore markets will reopen Tuesday after the weeklong National Day holiday, with the PBoC likely to continue setting USD/CNY fixing near 7.0730. The central bank will likely keep the yuan exchange rate basically stable ahead of the 13th round of the high-level US-China trade negotiations set for October 10-11 in Washington.

Earlier on Monday, Bloomberg reported that the discussions have focused on what US administration officials view as a three-phase process: 1) involving large-scale purchases of US agricultural and energy exports by China; 2) implementing intellectual-property commitments China made in a draft agreement this year and; 3) a partial rollback of US tariffs.

The pace of hiring has slowed in the US economy, which will finally erode the power of US household consumption and drag down American economic growth. The Fed remains on track for more monetary easing.

In addition, the US central bank will likely unveil plans to re-expand its balance sheet as early as November or January to 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 report added.

"We maintain our short USD/CNH position targeting 7.00 amid a mood of cautious optimism," Scotiabank further commented in the report.