Fed’s dovish stance and balance sheet re-expansion likely to weigh on dollar in months ahead, says Scotiabank

The Federal Reserve’s dovish stance and balance sheet re-expansion are expected to weigh on the dollar in the months ahead, according to the latest research report from Scotiabank.

The Fed’s Beige Book said on Wednesday that "persistent trade tensions and slower global growth" are weighing on the economy. Earlier, the minutes of the September FOMC meeting released last week showed that top Fed officials reckoned "A clearer picture of protracted weakness in investment spending, manufacturing production and exports had emerged" between the July policy meeting and their September gathering.

According to the US Commerce Department, US retail sales decreased a seasonally adjusted 0.3 percent in September from a month earlier, the first monthly decline since February. As consumer spending accounts for more than two-thirds of the US economy, more Fed monetary easing is needed to help weather the economic downturn, the report added.

In addition, the Fed announced last Friday that it will buy Treasury bills (T-bills) beginning October 15 at an initial pace of USD60 billion a month and continue those purchases into the second quarter of 2020.

The New York Fed bought USD7.501 billion of T-bills on Wednesday, the first operation under this renewed asset purchase programme. The US and China remain on track to reach a partial trade deal in our opinion, which would generally prop up EM Asian currencies the rest of the year.

"We would like to sell USD/CNH at 7.10 now, with an initial target of 6.95 and a stop of 7.20. In the meantime, we stay vigilant as further progress in the Hong Kong bill passed by the US House of Representatives would certainly dent market sentiment," Scotiabank further commented in the report.