Central Bank Watch: Upcoming Rate Decisions for BOC, RBA, & RBNZ
Central Bank Watch Overview:
- The trio of central banks overseeing the commodity currencies have already cut their main rates to all-time lows.
- It’s likely that the BOC, RBA, and RBNZ keep rates at these levels, augmented by extraordinary policy otherwise (e.g. quantitative easing (QE)), through 2020 and beyond.
- Retail trader positioningsuggests that the commodity currencies may still have gains ahead of them yet.
G10 Currencies’ Central Banks Keep Rates at All-Time Lows
As the shroud of the coronavirus pandemic lifts from the globe’s developed economies, G10 currencies’ central banks remain in an extremely accommodative position. It remains the case that every single central bank associated with the eight major currencies covered by DailyFX are holding their main interest rates to all-time lows.
Having produced record low interest rates and asset purchase programs that were deemed ‘too extreme’ during the last crises, The Great Recession and Eurozone debt crisis, central banks find themselves in a position unlike any other time in economic history.
We continue to draw our attention to the commodity currencies in particular, as even though the Australian, Canadian, and New Zealand Dollars no longer hold the relative yield advantage that defined ‘the carry trade,’ these currencies retain significant economic exposure to agriculture and base metals, making them prime vehicles for speculation around a rebound in global growth.
Bank of Canada Rate Cut Odds Ebb and Flow
The Bank of Canada has seen its interest rate odds ebb and flow in recent days, but the general trend has been towards a dissipation in expectations around another interest rate cut by the end of the year. Still,
the BOC has previously jawboned that more accommodative action may yet be taken. At the April BOC policy meeting, rates were kept on hold while new financial market stability mechanisms were announced in order to help keep credit flowing to businesses and households. Since then, interest rate expectations have slowly been dragged forward.
Bank of Canada Interest Rate Expectations (May 29, 2020) (Table 1)
Ahead of the June BOC meeting, according to Canada overnight index swaps, rates markets think that the BOC is extremely unlikely to act at the forthcoming meet (4% chance of a 25-bps rate cut), even if more is being done to gear-up extraordinary policy efforts. Just last week, OIS were discounting a 55% chance of a 25-bps rate cut by December 2020; these odds fell as low as 11% mid-week, and have since rebounded to 21% on the last trading day of May.
IG Client Sentiment Index: USD/CAD Rate Forecast (May 29, 2020) (Chart 1)
USD/CAD: Retail trader data shows 63.96% of traders are net-long with the ratio of traders long to short at 1.77 to 1. The number of traders net-long is 3.39% higher than yesterday and 22.67% higher from last week, while the number of traders net-short is 6.97% higher than yesterday and 6.17% higher from last week.
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 USD/CAD trading bias.
Reserve Bank of Australia on the Precipice of Lower Rates?
The Reserve Bank of Australia is meeting on the first Tuesday of June, and rates markets are unsure about whether or not rates will remain where they are currently situated. In recent months, the RBA has dropped its main overnight interest to an all-time low of 0.25% (after five rate cuts over the past year), as well as announced its own quantitative easing (QE) program, a step that was not taken during The Great Recession. Forward guidance has outlined a clear goal of keeping the three-year bond yield at 0.25% for the next three years.
RESERVE BANK OF AUSTRALIA INTEREST RATE EXPECTATIONS (MAY 29, 2020) (TABLE 2)
According to Australia overnight index swaps, there is a 46% chance of a 25-bps rate cut at the June RBA meeting. But given the commentary from RBA Governor Lowe suggests that the central bank is not prepared to move rates into negative territory, making any further rate cuts unlikely; the pricing may be a quirk due to the shape of the Australian bond yield curve.
To this end, the RBA has said that it will target the three-year bond yield at 0.25% - the same rate as the overnight cash rate – which is a reasonable assumption that the RBA will keeping its overnight cash rate at 0.25% or lower for at least the next three years. Like the RBNZ, lower rates may be coming soon for the RBA – just not quite yet.
IG Client Sentiment Index: AUD/USD Rate Forecast (MAY 29, 2020) (Chart 2)
AUD/USD: Retail trader data shows 31.13% of traders are net-long with the ratio of traders short to long at 2.21 to 1. The number of traders net-long is 8.49% lower than yesterday and 2.11% lower from last week, while the number of traders net-short is 15.02% higher than yesterday and 9.66% 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.
Reserve Bank of New Zealand May Not Be Done Just Yet
Nothing has changed for the Reserve Bank of New Zealand since convening their emergency meeting on March 16, where they slashed the main overnight cash rate by 75-bps to an all-time low of 0.25%. The coronavirus pandemic has not hit the New Zealand economy has hard as other developed economies – New Zealand hasn’t reported a new infection in a week - but that hasn’t stopped the RBNZ from going to its most extreme easing stance in its history in order to buffer the economy from contagion.
To this end, as part of the emergency interest rate cut, the RBNZ made clear that it would begin forward guidance, indicating that the main interest rate would stay at 0.25% for at least the next 12-months. But that doesn’t more can’t be done: the RBNZ noted that 0.25% “was currently the lower limit, given the operational readiness of the financial system for very low or negative interest rates.”
But at the May RBNZ meeting, the tone changed. “The committee noted that a negative official cash rate will become an option in the future, although at present financial institutions are not yet operationally ready,” the RBNZ said.“It was noted that discussions with financial institutions about preparing for a negative OCR are ongoing," which "will become an option" in 2021.
RESERVE BANK OF NEW ZEALAND INTEREST RATE EXPECTATIONS (MAY 29, 2020) (Table 3)
For now, markets are interpreting the commentary from the RBNZ that, while lower interest rates may be coming, they may not arrive in 2020. Through the last meeting of the year, the November RBNZ meeting, there is a 20% chance of a 25-bps rate cut – down from 34% one-month ago.
Our commentary remains static. “But against the backdrop where more dovish policy action has been hinted at by RBNZ Governor Orr, including extraordinary policy measures such as QE, then it would be shortsighted to dismiss the possibility of a rate cut arriving before the year is out.”
IG Client Sentiment Index: NZD/USD Rate Forecast (MAY 29, 2020) (Chart 3)
NZD/USD: Retail trader data shows 40.50% of traders are net-long with the ratio of traders short to long at 1.47 to 1. The number of traders net-long is 1.56% higher than yesterday and 23.22% higher from last week, while the number of traders net-short is 2.80% lower than yesterday and 36.23% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests NZD/USD 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 NZD/USD price trend may soon reverse lower despite the fact traders remain net-short.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.