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BOC, ECB, & RBA Rate Expectations Drop as Global Recession Fears Cool - Central Bank Watch

BOC, ECB, & RBA Rate Expectations Drop as Global Recession Fears Cool - Central Bank Watch

2019-10-14 15:00:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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Central Bank Watch Overview:

  • With Brexit on a path towards resolution and the US-China trade war looking like it will move past the impasse, fears of a global recession have abated sharply in recent days.
  • While the RBA looks like it will cut rates again in 2019, rates markets are no longer pricing in action from the ECB, and the BOC isn’t expected to cut for nearly an entire year.
  • Retail trader positioningsuggests EURUSD may continue to rise and USDCAD may continue to fall.

Looking for longer-term forecasts on the Australian Dollar, Canadian Dollar, or the Euro? Check out the DailyFX Trading Guides.

With Brexit on a path towards resolution and the US-China trade war looking like it move past the impasse, fears of a global recession have abated sharply in recent days. Strong gains by global equity markets coupled with the third-best two-day performance in the British Pound’s history seem to suggest that risk appetite is evolving in a positive way very quickly.

In turn, the reach for higher yielding currencies and high beta assets has come in tandem with a drop in G10 currencies’ central banks rate cut cycle expectations. While the RBA looks like it will cut rates again in 2019, rates markets are no longer pricing in action from the ECB, and the BOC isn’t expected to cut for nearly an entire year.

ANOTHER ECB RATE CUT IN 2019 REMAINS UNCERTAIN

European Central Bank rate cut odds have eased off in recent days, in part due to progress on the Brexit and US-China trade war fronts, but also on news that Eurogroup finance ministers agreed to a fiscal stabilization fund – a “rainy day fund” – to use in the event of future crises. While it is not a fiscal union, it is a step in a direction of making the Eurozone more sustainable over time. The ECB may not be the only game in town for much longer; fiscal authorities are waking up.

EUROPEAN CENTRAL BANK INTEREST RATE EXPECTATIONS (OCTOBER 3, 2019) (TABLE 1)

BOC, ECB, & RBA Rate Expectations Drop as Global Recession Fears Cool - Central Bank Watch

Overnight index swaps are currently pricing in an 81% chance of no change in rates at the October ECB meeting. Having just cut rates in September, it seems highly unlikely that the ECB would unwind such measures so quickly. But the fact of the matter is that rate cut expectations are waning: one month ago, there was a 41% chance of a 10-bps rate cut; now there is a 19% chance of a 10-bps rate hike. Rates markets do expect more action from the ECB in the first half of 2020: there is a 56% chance of a rate cut in March 2020.

IG Client Sentiment Index: EURUSD Rate Forecast (OCTOBER 11, 2019) (Chart 1)

BOC, ECB, & RBA Rate Expectations Drop as Global Recession Fears Cool - Central Bank Watch

EURUSD: Retail trader data shows 49.1% of traders are net-long with the ratio of traders short to long at 1.04 to 1. The number of traders net-long is 9.3% lower than yesterday and 25.6% lower from last week, while the number of traders net-short is 9.3% lower than yesterday and 40.3% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURUSD prices may continue to rise. Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EURUSD trading bias.

No BOC Rate Cut Expected Until September 2020

The Canadian Dollar has outperformed its commodity-currency brethren throughout 2019, thanks in part to its less-direct involvement in the US-China trade war. Even as the early-September oil price shock reversed, the Canadian economy proved resilient, and the some: the September Canada jobs report was another blowout, dragging the unemployment rate down to 5.5%. For all the concerns about global growth, Canada appears to be an exception.

Bank of Canada Interest Rate Expectations (OCTOBER 11, 2019) (Table 2)

BOC, ECB, & RBA Rate Expectations Drop as Global Recession Fears Cool - Central Bank Watch

According to overnight index swaps, the chance of a Bank of Canada rate cut before the end of the year has been almost eliminated. According to overnight index swaps, there is only a 5% chance of a 25-bps rate cut at the October BOC meeting; one week ago, those odds were 23%. Rates markets are rather benign for the foreseeable future: no rate changes are expected through the first half of 2020, and September 2020 clocks in with a not-so-convincing 54% chance.

IG Client Sentiment Index: USDCAD Rate Forecast (OCTOBER 11, 2019) (Chart 2)

BOC, ECB, & RBA Rate Expectations Drop as Global Recession Fears Cool - Central Bank Watch

USDCAD: Retail trader data shows 41.0% of traders are net-long with the ratio of traders short to long at 1.44 to 1. In fact, traders have remained net-short since September 12 when USDCAD traded near 1.3167; price has moved 0.3% higher since then. The percentage of traders net-long is now its highest since Sep 15 when USDCAD traded near 1.32101. The number of traders net-long is 1.6% higher than yesterday and 35.7% higher from last week, while the number of traders net-short is 32.9% lower than yesterday and 46.5% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USDCAD prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current USDCAD price trend may soon reverse lower despite the fact traders remain net-short.

RBA Rate Cut Less Likely in October, More Likely in November 2019

The prospect of the US-China trade war de-escalating has been a promising development for the Australian and New Zealand economies, and as a result, both the Reserve Bank of Australia and the Reserve Bank of New Zealand are seeing their rate cut expectations ease off. But that doesn’t mean the rate cut cycles are finished. For the RBA, more action is on the horizon shortly.

Reserve Bank of Australia Interest Rate Expectations (OCTOBER 11, 2019) (Table 3)

BOC, ECB, & RBA Rate Expectations Drop as Global Recession Fears Cool - Central Bank Watch

Odds of a 25-bps rate cut at the November RBA meeting have dropped over the past week, from 47% to 32% today. Rates markets are convincing that a rate cut is coming soon, however: there is a 58% chance of a cut at the December RBA meeting. At that point, traders will need to reassess the interest rate environment: after all, there is currently no rate cut priced-in during 2020.

IG Client Sentiment Index: AUDUSD Rate Forecast (OCTOBER 11, 2019) (Chart 3)

BOC, ECB, & RBA Rate Expectations Drop as Global Recession Fears Cool - Central Bank Watch

AUDUSD: Retail trader data shows 66.2% of traders are net-long with the ratio of traders long to short at 1.96 to 1. In fact, traders have remained net-long since July 19 when AUDUSD traded near 0.6981; price has moved 2.7% lower since then. The number of traders net-long is 14.2% lower than yesterday and 15.3% lower from last week, while the number of traders net-short is 1.5% lower than yesterday and 5.8% higher 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. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current AUDUSD price trend may soon reverse higher despite the fact traders remain net-long.

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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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