BOC, RBA, & RBNZ Interest Rate Expectations Update

Central Bank Watch Overview:

  • The RBNZ has already hiked rates earlier this month, and another 25-bps rate hike is priced-in for November.
  • Meanwhile, the BOC is turning more hawkish. Otherwise, the RBA appears to be on hold for the foreseeable future.
  • Retail trader positioning suggests that the near-term outlook is bullish for the trio of major commodity currencies.

Central Banks Regain Composure

In this edition of Central Bank Watch, we’re examining the rates markets around the Bank of Canada, Reserve Bank of Australia, and Reserve Bank of New Zealand. After mid-year concerns around the delta variant, all three of the major commodity currency central banks appear to be regaining their nerve with respect to proceeding towards stimulus withdrawal. The RBNZ hiked rates in October, while rates markets have pulled forward BOC rate hike odds into the first half of 2022. Otherwise, the RBA will remain the most dovish of the trio.

For more information on central banks, please visit the DailyFX Central Bank Release Calendar.

Bank of Canada Inching Closer Towards Stimulus Withdrawal

Nearly a month removed from the Canadian federal election has passed, and with inflation continuing to run above expectations, it seems likely that the Bank of Canada will soon restart its stimulus withdrawal efforts when it meets later this month. Currently, asset purchases are running at a rate of C$2 billion per week. Following the superb September Canadian jobs data and surging energy prices– energy accounts for approximately 11% of Canadian GDP – there is reason to believe there is less slack in the economy than anticipated mid-year.

Bank of Canada Interest Rate Expectations (October 14, 2021) (Table 1)

While a rate hike is still several months away, it does appear that a restart of stimulus withdrawal efforts have spurred some speculation that the BOC will act sooner than previously anticipated when the time to raise rates arrives. In late-September, there was a 56% chance of a 25-bps rate hike by April 2022. Now, in mid-October, Canada overnight index swaps are pricing in a 101% probability (100% chance for a 25-bps rate hike; 1% chance for a 50-bps rate hike).

IG Client Sentiment Index: USD/CAD Rate Forecast (October 14, 2021) (Chart 1)

Central Bank Watch: BOC, RBA, & RBNZ Interest Rate Expectations Update

USD/CAD: Retail trader data shows 70.65% of traders are net-long with the ratio of traders long to short at 2.41 to 1. The number of traders net-long is 8.51% lower than yesterday and 4.19% higher from last week, while the number of traders net-short is 7.97% higher than yesterday and 15.93% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USD/CAD prices may continue to fall.

Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current USD/CAD price trend may soon reverse higher despite the fact traders remain net-long.

Reserve Bank of Australia’s ‘Lower for Longer’

Last month’s Reserve Bank of Australia meeting produced a reduction in asset purchases A$3 billion per week, but the central bank simultaneously announced that it would extend its QE program from November 2021 until February 2022. Persisting trade tensions persist with China, its largest trading partner, and concerns around the Chinese property sector swirling, markets are expecting that the RBA will slow walk any further stimulus withdrawal efforts in the near-term.

RESERVE BANK OF AUSTRALIA INTEREST RATE EXPECTATIONS (October 14, 2021) (TABLE 2)

Central Bank Watch: BOC, RBA, & RBNZ Interest Rate Expectations Update

The ‘lower for longer’ stance on the QE front has translated into a reduction in expectations that rate hikes are coming soon thereafter. Of course, tapering isn’t tightening, but it’s been long understood that the RBA’s QE program would be completely tapered off prior to any rate hikes. According to Australia overnight index swaps, there is a 29% chance of a rate cut through December 2021, down from 29% at the end of September.

It remains the case that “nevertheless, the RBA had previously pledged that it would keep rates at their current level or lower for three years starting in March 2020, and with record levels of Australian Dollar shorts in the futures market, it may only take a small change in market conditions – either an improved trade relationship with China, a reduction in pressure in base metals, or the end of lockdowns – that could provoke a violent repricing in Australian rate odds, which could lead to a considerable short covering rally by the Aussie.

IG Client Sentiment Index: AUD/USD Rate Forecast (OCTOBER 14, 2021) (Chart 2)

Central Bank Watch: BOC, RBA, & RBNZ Interest Rate Expectations Update

AUD/USD: Retail trader data shows 47.12% of traders are net-long with the ratio of traders short to long at 1.12 to 1. The number of traders net-long is 11.88% lower than yesterday and 9.02% lower from last week, while the number of traders net-short is 8.71% higher than yesterday and 0.33% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests AUD/USD prices may continue to rise.

Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger AUD/USD-bullish contrarian trading bias.

RBNZ Back on Track, Indeed

Now that the New Zealand government has abandoned its ‘zero covid’ policy, policymakers are likewise learning to live with the virus. The October RBNZ meeting produced a 25-bps rate hike, and with evidence of further containment in COVID-19 infections, markets are of the mindset that the RBNZ will continue to deliver on its promise to tighten policy further by the end of the year.

RESERVE BANK OF NEW ZEALAND INTEREST RATE EXPECTATIONS (OCTOBER 14, 2021) (Table 3)

Central Bank Watch: BOC, RBA, & RBNZ Interest Rate Expectations Update

Ahead of the October RBNZ meeting, it was noted that “markets remain adamant that a rate move will arrive by the end of the year, with New Zealand overnight index swaps pricing in a 190% chance of a 25-bps hike by the end of the year; that is, a 100% chance of a 25-bps rate hike and a 90% chance of 50-bps worth of hikes.” With a 25-bps rate hike on the books, markets are holding steady in their expectations: New Zealand overnight index swaps are now pricing in a 91% chance of another 25-bps rate hike.

IG Client Sentiment Index: NZD/USD Rate Forecast (OCTOBER 14, 2021) (Chart 3)

Central Bank Watch: BOC, RBA, & RBNZ Interest Rate Expectations Update

NZD/USD: Retail trader data shows 50.18% of traders are net-long with the ratio of traders long to short at 1.01 to 1. The number of traders net-long is 12.03% lower than yesterday and 20.80% lower from last week, while the number of traders net-short is 10.39% lower than yesterday and 11.82% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests NZD/USD prices may continue to fall.

Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current NZD/USD price trend may soon reverse higher despite the fact traders remain net-long.

— Written by Christopher Vecchio, CFA, Senior Strategist

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