Central Bank Watch Overview:
- Fears of an oncoming global recession have provoked sharp swings in G10 currencies’ central banks’ interest rate expectations in recent days.
- It’s very possible that all three of the European Central Bank, the Reserve Bank of Australia, and the Reserve Bank of New Zealand cut interest rates again before 2019 finishes.
- Retail trader positioning suggests EURUSD rates may rise while NZDUSD rates will continue to fall.
Looking for longer-term forecasts on the Australian Dollar, Euro, or the New Zealand Dollar? Check out the DailyFX Trading Guides.
Fears of an oncoming global recession have provoked sharp swings in G10 currencies’ central banks’ interest rate expectations in recent days. With both the September US ISM Manufacturing and Services gauges badly missing expectations, coming alongside disappointing readings out of Europe and Asia, traders have been jettisoning higher yielding and high beta currencies in anticipation of more easing from central banks. It’s very possible that all three of the European Central Bank, the Reserve Bank of Australia, and the Reserve Bank of New Zealand cut interest rates again before 2019 finishes.
ANOTHER ECB RATE CUT IN 2019 REMAINS UNCERTAIN
Considering the tone deployed by ECB President Mario Draghi in recent weeks, especially after the September ECB meeting, it seems very likely that the door remains open for more rate cuts. Indeed, interest rate markets are still pricing in more easing over the coming months.
EUROPEAN CENTRAL BANK INTEREST RATE EXPECTATIONS (OCTOBER 3, 2019) (TABLE 1)
Overnight index swaps are currently pricing in a 13% chance of a 10-bps rate hike at the October ECB meeting – or a 0% chance of a rate cut. Rates markets have been steady over the past week; although, since the start of September, the odds of the main rate being -0.50% after the October ECB meeting have increased from 30% to 85%. There is a 42% chance of a second 10-bps rate cut coming at the December ECB meeting. By the time January 2020 rolls around, markets are anticipating more action: there is a 60% chance of a move at the first meeting of next year.
IG Client Sentiment Index: EURUSD Rate Forecast (OCTOBER 3, 2019) (Chart 1)
EURUSD: Retail trader data shows 67.6% of traders are net-long with the ratio of traders long to short at 2.09 to 1. In fact, traders have remained net-long since July 1 when EURUSD traded near 1.11947; price has moved 1.9% lower since then. The number of traders net-long is 5.2% lower than yesterday and 9.9% lower from last week, while the number of traders net-short is 4.5% higher than yesterday and 15.8% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EURUSD 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 EURUSD price trend may soon reverse higher despite the fact traders remain net-long.
Read more: EUR/USD Holds Channel Support, EUR/JPY Losses Deepen as Global Growth Concerns Rise
RBNZ Rate Cut Timing Pushed Back from September to November 2019
The New Zealand Dollar has been under pressure once more as global growth concerns have flared. Speculation is gathering pace that commodity-sensitive sectors will be hit hard as the latest disappointing data flow comes against the backdrop of a truce in the US-China trade war. As a result, expectations around the timing of the next RBNZ interest rate cut have been pulled forward.
Reserve Bank of New Zealand Interest Rate Expectations (OCTOBER 3, 2019) (Table 2)
According to overnight index swaps, the odds of the RBNZ cutting rates in November have increased over the past week from 70% to 90% today. Two months ago, there were only 22% odds of the RBNZ dropping its overnight cash rate down to 0.75%. As this is the last RBNZ meeting of the year, rates markets are front-loaded: there is a 62% chance of a 25-bps rate cut at the first meeting of 2020 in February.
IG Client Sentiment Index: NZDUSD Rate Forecast (OCTOBER 3, 2019) (Chart 2)
NZDUSD: Retail trader data shows 78.8% of traders are net-long with the ratio of traders long to short at 3.72 to 1. In fact, traders have remained net-long since Jul 23 when NZDUSD traded near 0.66929; price has moved 5.8% lower since then. The number of traders net-long is 0.5% higher than yesterday and 3.5% higher from last week, while the number of traders net-short is 18.8% lower than yesterday and 17.5% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests NZDUSD prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger NZDUSD-bearish contrarian trading bias.
RBA Rate Cut Less Likely in October, More Likely in November 2019
Although Australia’s two largest trading partners have taken steps to de-escalate the US-China trade war, signs that global growth is about to head sharply lower has weighed on the commodity-sensitive currency. Even after the Reserve Bank of Australia’s 25-bps rate cut at the start of October, there is now greater scope for additional easing over the coming months.
Reserve Bank of Australia Interest Rate Expectations (OCTOBER 3, 2019) (Table 3)
The next time the RBA meets, rates markets are pricing in a 49% chance of a 25-bps rate cut. The November RBA meeting has seen a sharp rise in cut odds in recent weeks, with the probability of further easing increasing from 26% at the start of September to 49% today. If no rate cut materializes in November, there is a 66% chance of a 25-bps rate cut at the December RBA meeting.
IG Client Sentiment Index: AUDUSD Rate Forecast (OCTOBER 3, 2019) (Chart 3)
AUDUSD: Retail trader data shows 74.7% of traders are net-long with the ratio of traders long to short at 2.96 to 1. In fact, traders have remained net-long since July 19 when AUDUSD traded near 0.69732; price has moved 3.4% lower since then. The number of traders net-long is 5.4% lower than yesterday and 8.9% higher from last week, while the number of traders net-short is 13.8% higher than yesterday and 24.0% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests AUDUSD prices may continue to fall. Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed AUDUSD trading bias.
FX TRADING RESOURCES
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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail at cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
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