This reflationary environment and consequent hawkish shift in major central banks’ communication, coincident with improvement in their respective domestic and exogenous risk environment, has brought monetary policy normalization into focus. In its July meeting, the US Fed had stated that it “expects to begin implementing its balance sheet normalization programme relatively soon”. The US Fed balance sheet reduction is incrementally positive for the dollar due to the withdrawal of liquidity from the system. However, given the unfolding scenario of reduced monetary policy divergence by other central banks with the Fed, any sharp appreciation of the dollar is unlikely. We also expect that the stance of US monetary policy will not be determined by balance sheet normalization in isolation, but by its combination with the path for the Fed funds rate.

Source: Mint September 07, 2017 18:23 UTC