Central Bank Watch: BOC, RBA, & RBNZ Rate Expectations; AUD, CAD, NZD Positioning Update
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 positioningsuggests that the commodity currencies are on mostly neutral footing.
Bank of Canada Holds the Course
The Bank of Canada’s October rate decision is not for a few more weeks, but little is expected to transpire. While the Canadian economy has seen the recovery accelerate in recent months, there’s still not enough confidence about the state of the US economy – Canada’s largest trading partner, from which 20% of Canadian GDP is derived – for policymakers to head back towards any sense of normalization.
Bank of Canada Interest Rate Expectations (OCTOBER 15, 2020) (Table 1)
As it were, 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 a 4% chance. At present time, it would appear that the Bank of Canada’s efforts along the interest rate front are finished. Further to this point, we maintain that “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 (OCTOBER 15, 2020) (Chart 1)
USD/CAD: Retail trader data shows 74.11% of traders are net-long with the ratio of traders long to short at 2.86 to 1. The number of traders net-long is 25.20% lower than yesterday and 8.64% lower from last week, while the number of traders net-short is 18.53% lower than yesterday and 24.33% lower 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 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 Looks at a Rate Cut
The Reserve Bank of Australia’s October policy meeting proved to be significant: it has been suggested that the RBA could produce a rate cut as soon as November. But for the negative interest rate fans out there, now’s not the time to get excited: the RBA has signaled its willingness to cut the main rate by 15-bps, bringing it down to 0.1% from 0.25%.
RESERVE BANK OF AUSTRALIA INTEREST RATE EXPECTATIONS (OCTOBER 15, 2020) (TABLE 2)
According to Australia overnight index swaps, there is a 72% chance of a rate cut at the November RBA meeting. It’s worth noting that the rate cut is consistent with RBA Governor Lowe’s previous comments, which suggested that the central bank is not ready to move rates into negative territory. We thus maintain that “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.” To this end, a cut in the main rate to 0.1% fits within our expectations.
IG Client Sentiment Index: AUD/USD Rate Forecast (OCTOBER 15, 2020) (Chart 2)
AUD/USD: Retail trader data shows 50.73% of traders are net-long with the ratio of traders long to short at 1.03 to 1. In fact, traders have remained net-long since Oct 01 when AUD/USD traded near 0.72, price has moved 1.42% lower since then. The number of traders net-long is unchanged than yesterday and 7.26% higher from last week, while the number of traders net-short is 21.08% lower than yesterday and 31.73% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests AUD/USD prices may continue to fall.
Our data shows traders are now net-long AUD/USD for the first time since Oct 01, 2020 when AUD/USD traded near 0.72. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger AUD/USD-bearish contrarian trading bias.
Reserve Bank of New Zealand Hot on Negative Rates
We’ve heard hints about it for months. At the end of June, in an interview, RBNZ Governor Orr said the following when questioned about negative interest rates becoming policy: "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'." It’s still the case that the RBNZ overnight index swaps curve reflects a belief that negative interest rates are around the corner.
RESERVE BANK OF NEW ZEALAND INTEREST RATE EXPECTATIONS (OCTOBER 15, 2020) (Table 3)
The RBNZ overnight index swaps (OIS) curve is suggesting that the main interest rate will fall to 0% by April 2021 (>100% chance), and that negative interest rates will emerge by May 2021 (65% chance).
IG Client Sentiment Index: NZD/USD Rate Forecast (October 15, 2020) (Chart 3)
NZD/USD: Retail trader data shows 36.82% of traders are net-long with the ratio of traders short to long at 1.72 to 1. The number of traders net-long is 24.72% lower than yesterday and 11.30% lower from last week, while the number of traders net-short is 25.53% lower than yesterday and 26.00% 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.