Central banks to keep supportive monetary policy, weakening USD – MUFG

In the space of a little more than 24 hours the Federal Reserve, the SNB, the Norges Bank and the Bank of Japan have updated its monetary policies. Central banks are set to keep stimulus, backed by governments too. Therefore, the US dollar is expected to remain on a downward trajectory, per MUFG Bank.

Key quotes

“The BoE as expected left its policy stance unchanged after increasing QE by GBP150 B in November. It did extend the Funding for Lending Scheme for SMEs and importantly emphasised the flexibility of the QE program in terms of the pace of purchases being open for adjusting based on the outcome of the UK-EU trade negotiations.”

“The SNB unsurprisingly, countered strongly in communications after its meeting arguing that the US Treasury currency report does not adequately account for Switzerland’s particular situation. We concur with that and it is hard to layout credible grounds to show SNB action is grounded in gaining a competitive advantage through currency manipulation. The SNB message was clear – there will be no change in the monetary policy strategy.”

“The Norges Bank was more on the hawkish side in comparison communicating that it intended to raise its key policy rate in H1 2022, sooner than the previous plan to raise rates by around year-end. But rates are at zero percent and are set to remain there next year.”

“The BoJ announced an extension to its COVID-19 loan programmes by a further six months to September 2021 while also adjusting the terms in order to make them more flexible. Perhaps more importantly though, the BoJ announced a full review of its monetary policy. The review will consider ‘further effective and sustainable monetary easing’ and is scheduled to conclude quickly, by March 2021. We see this in part as a reflection of possibly building risks of JPY appreciation through the 100-level – something we now expect next year. The BoJ is set to try and counter this disinflationary FX move.” 

“The announcements this week certainly reinforce the prospects of loose monetary conditions and favourable risk asset performance, which led by the Fed will keep the US dollar on a weakening path.”