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Central Bank Watch: BOC, RBA, & RBNZ Interest Rate Expectations Update

Central Bank Watch: BOC, RBA, & RBNZ Interest Rate Expectations Update

Christopher Vecchio, CFA, Senior Strategist
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Central Bank Watch Overview:

  • Budding optimism over a global growth rebound post-pandemic is helping fuel demand for global growth-linked assets and currencies, like the Australian, Canadian, and New Zealand Dollars.
  • Each of the commodity currency central banks – the Bank of Canada, Reserve Bank of Australia, and Reserve Bank of New Zealand – have seen rate cut expectations evaporate.
  • Retail trader positioning suggests that the commodity currencies are on mostly bullish footing (bullish AUD, NZD; neutral CAD).

Central Bank Calendar Heats Up

The third week of December is upon financial markets, in what will be the last ‘full’ trading week of the year. With Christmas Day the following Friday and New Year’s Day the Friday after that, the economic calendar is about to thin out significantly. But before that happens, there are several central bank meetings due scheduled for the week ahead.

- Wednesday, December 16: USD Federal Reserve Rate Decision, Summary of Economic Projections, & Press Conference

- Thursday, December 17: GBP Bank of England Rate Decision

- Thursday, December 17: CHF Swiss National Bank Rate Decision

- Friday, December 18: JPY Bank of Japan Rate Decision

For more information on central banks, please visit the DailyFX Central Bank Release Calendar.

In this edition of Central Bank Watch, we’ll cover the trio of central banks that won’t be in the news the coming week, the Bank of Canada, Reserve Bank of Australia, and Reserve Bank of New Zealand, all of whom are dealing with rapidly appreciating currencies versus the US Dollar.

Bank of Canada Looks to 2023

For the past several weeks, BOC Governor Tiff Macklem has been crystal clear regarding the BOC’s crisis policies, saying that “if you are a household considering making a major purchase, if you’re a business considering investing, you can be confident that interest rates will be low for a long time.” At the December BOC rate decision, BOC Governor Macklem suggested that rates could remain at their ultra-low level “probably” until 2023.

Bank of Canada Interest Rate Expectations (DECEMBER 11, 2020) (Table 1)

Central Bank Watch: BOC, RBA, & RBNZ Interest Rate Expectations Update

As such, interest rate cut or hike expectations are muted thanks to firm forward guidance offered by BOC Governor Macklem. Through October 2021, there is only a 2% chance of a 25-bps rate hike by the BOC. Although some months between present day and October 2021 have higher probabilities suggesting increased odds of a rate cut, it should be noted that this is likely a pricing quirk in the Canadian overnight index swaps curve rather than a suggestion that another rate cut is likely to materialize.

IG Client Sentiment Index: USD/CAD Rate Forecast (DECEMBER 11, 2020) (Chart 1)

Central Bank Watch: BOC, RBA, & RBNZ Interest Rate Expectations Update

USD/CAD: Retail trader data shows 72.21% of traders are net-long with the ratio of traders long to short at 2.60 to 1. The number of traders net-long is 9.04% lower than yesterday and 7.95% higher from last week, while the number of traders net-short is 4.78% higher than yesterday and 0.30% 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 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 Can’t Hold Back AUD

The last two RBA rate decisions have produced little by way of meaningful policy changes, but some of the shifts at the margins suggest that the RBA is feeling dejected. That is, the RBA is seeing economic data come in so much better than expected, they don’t have the ability to stand in the way of the strengthening Australian Dollar.

Even after shifting the focus of policy setting at the November RBA meeting, where officials out a greater focus on actual labor market outcomes (e.g. the unemployment rate) over expected price pressures, the December RBA meeting produced a general consensus that, yes, the situation was still “better than expected,” in Governor Phillip Lowe’s words.

RESERVE BANK OF AUSTRALIA INTEREST RATE EXPECTATIONS (DECEMBER 11, 2020) (TABLE 2)

Central Bank Watch: BOC, RBA, & RBNZ Interest Rate Expectations Update

The RBA is effectively admitting that they’re keeping interest rates where they are because…everyone else is doing it too. Beyond that, the data just doesn’t support the efforts, and rates markets don’t foresee any shifts in policy henceforth. According to Australia overnight index swaps, there is between a 16% to 25% chance of a rate cut through December 2021, which appears to be nothing more than a pricing quirk due to the RBA’s extraordinary efforts to institute yield curve control. The RBA will be keeping its overnight cash rate at 0.1% or lower for at least the next two and a half years.

IG Client Sentiment Index: AUD/USD Rate Forecast (DECEMBER 11, 2020) (Chart 2)

Central Bank Watch: BOC, RBA, & RBNZ Interest Rate Expectations Update

AUD/USD: Retail trader data shows 28.68% of traders are net-long with the ratio of traders short to long at 2.49 to 1. The number of traders net-long is 8.08% lower than yesterday and 18.22% lower from last week, while the number of traders net-short is 3.47% lower than yesterday and 8.96% 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 Backs Away from Negative Rates

The RBNZ may finally be ending their game of ‘will they or won’t they’ when it comes to cutting the main overnight cash rate into negative territory, thanks in part to the surge in housing prices seen in New Zealand this year. RBNZ Governor Adrian Orr has had to rebuff a government request to include housing prices in the formal policy setting process, which while seemingly benign, suggests that the economy is experiencing a price bubble and thus would not be receptive to even lower (e.g. negative) interest rates.

RESERVE BANK OF NEW ZEALAND INTEREST RATE EXPECTATIONS (DECEMBER 11, 2020) (Table 3)

Central Bank Watch: BOC, RBA, & RBNZ Interest Rate Expectations Update

Accordingly, interest rate expectations remains stable for the RBNZ, and previous pricing forecasting the possibility of negative interest rates emerging in 2021 have disappeared. New Zealand overnight index swaps (OIS) are now suggesting that the main rate will remain at its current level through October 2021.

IG Client Sentiment Index: NZD/USD Rate Forecast (DECEMBER 11, 2020) (Chart 3)

Central Bank Watch: BOC, RBA, & RBNZ Interest Rate Expectations Update

NZD/USD: Retail trader data shows 23.84% of traders are net-long with the ratio of traders short to long at 3.19 to 1. The number of traders net-long is 16.32% lower than yesterday and 21.26% lower from last week, while the number of traders net-short is 5.33% lower than yesterday and 5.19% 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.

Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger NZD/USD-bullish contrarian trading bias.

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

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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