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Central Bank Watch: BOC, RBA, & RBNZ Rate Expectations; USD/CAD, AUD/USD, & NZD/USD Positioning Update

Central Bank Watch: BOC, RBA, & RBNZ Rate Expectations; USD/CAD, AUD/USD, & NZD/USD Positioning Update

2020-09-18 14:00:00
Christopher Vecchio, CFA, Senior Strategist
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Central Bank Watch Overview:

  • The BOC and RBA are likely to stay on hold for the foreseeable future; traders may disregard quirks in the overnight index swaps curves suggesting otherwise in the near-term, given commentary from central bank governors.
  • The RBNZ, on the other hand, seems poised to move into negative interest rate territory in the first half of 2021.
  • Retail trader positioning suggests that the commodity currencies are on mostly neutral footing.
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Bank of Canada to Stay on Low Rate Path

The Bank of Canada’s September rate decision offered few material changes from the prior meeting, although it was noted that the Canadian economy has picked up its pace of recovery through the third quarter. It would appear that Bank of Canada interest rate expectations, which have been steady for several months, will remain stable for the foreseeable future.

Bank of Canada Interest Rate Expectations (SEPTEMBER 17, 2020) (Table 1)

Central Bank Watch: BOC, RBA, & RBNZ Rate Expectations; USD/CAD, AUD/USD, & NZD/USD Positioning Update

At the end of April, there was a 55% chance of a 25-bps interest rate cut in December 2020, according to Canada overnight index swaps. In mid-August, there was a 17% chance. Now, there is an 8% chance. It still holds that the Bank of Canada’s efforts along the interest rate front are finished. If the BOC does anything else, it may not be to cut interest rates to zero – or to negative territory. While negative rates are a potential for other major currencies (see: RBNZ and the New Zealand Dollar), the Canadian Dollar is not weighed down by this consideration at present time.

IG Client Sentiment Index: USD/CAD Rate Forecast (SEPTEMBER 17, 2020) (Chart 1)

Central Bank Watch: BOC, RBA, & RBNZ Rate Expectations; USD/CAD, AUD/USD, & NZD/USD Positioning Update

USD/CAD: Retail trader data shows 72.70% of traders are net-long with the ratio of traders long to short at 2.66 to 1. The number of traders net-long is 0.79% lower than yesterday and 3.35% lower from last week, while the number of traders net-short is 3.75% lower than yesterday and 15.10% 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.

Positioning is more net-long than yesterday but less 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 Maintains Yield Curve Control

The Reserve Bank of Australia’s September policy meeting was another waypoint amid the three-year promise to keep its interest rate at an all-time low of 0.25% amid implementation of its first-ever quantitative easing (QE) program. Few signals regarding immediate action suggest that the RBA is on a steady course.

RESERVE BANK OF AUSTRALIA INTEREST RATE EXPECTATIONS (SEPTEMBER 17, 2020) (TABLE 2)

Central Bank Watch: BOC, RBA, & RBNZ Rate Expectations; USD/CAD, AUD/USD, & NZD/USD Positioning Update

According to Australia overnight index swaps, there is a 66% chance of a 25-bps rate cut at the October RBA meeting. But as the commentary from RBA Governor Lowe would suggest, the central bank is not ready to move rates into negative territory, making any further rate cuts unlikely; the pricing may be a quirk due to shifts at the short-end of the Australian government bond yield curve.

It's worth repeating: 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. Nothing has changed to alter this line of thinking.

IG Client Sentiment Index: AUD/USD Rate Forecast (SEPTEMBER 17, 2020) (Chart 2)

Central Bank Watch: BOC, RBA, & RBNZ Rate Expectations; USD/CAD, AUD/USD, & NZD/USD Positioning Update

AUD/USD: Retail trader data shows 41.78% of traders are net-long with the ratio of traders short to long at 1.39 to 1. The number of traders net-long is 2.72% higher than yesterday and 5.01% higher from last week, while the number of traders net-short is 1.35% lower than yesterday and 13.47% 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.

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 AUD/USD trading bias.

Reserve Bank of New Zealand Hot and Cold on Negative Rates

Let’s recall an interview at the end of June with RBNZ Governor Orr, when he was asked about the possibility of negative interest rates: "We could…we've been saying to banks, 'get your act together, be prepared, make sure you're able to put a negative sign in front of your wholesale interest rates if we need to go there'." The RBNZ overnight index swaps curve is reflecting that negative interest rates are becoming more likely.

RESERVE BANK OF NEW ZEALAND INTEREST RATE EXPECTATIONS (SEPTEMBER 17, 2020) (Table 3)

Central Bank Watch: BOC, RBA, & RBNZ Rate Expectations; USD/CAD, AUD/USD, & NZD/USD Positioning Update

While odds of negative interest rates emerging this year are low (14% chance), they have increased relative to mid-August, when there was a 12% chance. But the RBNZ overnight index swaps (OIS) curve is suggesting that the main interest rate will fall to 0% by February 2021 (66% chance), and that negative interest rates will emerge by May 2021 (61% chance).

IG Client Sentiment Index: NZD/USD Rate Forecast (September 17, 2020) (Chart 3)

Central Bank Watch: BOC, RBA, & RBNZ Rate Expectations; USD/CAD, AUD/USD, & NZD/USD Positioning Update

NZD/USD: Retail trader data shows 32.55% of traders are net-long with the ratio of traders short to long at 2.07 to 1. The number of traders net-long is 12.25% lower than yesterday and 17.46% higher from last week, while the number of traders net-short is 13.58% higher than yesterday and 8.49% higher 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.

Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed NZD/USD trading bias.

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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

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