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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:

  • It’s been a slow first week of the year for the major central banks, and activity is unlikely to get more exciting in the next few days.
  • But rates markets remain active, and each of the central banks tied to the commodity currencies (AUD, CAD, NZD) have seen rate cut odds dissipate for 2021.
  • Retail trader positioning indicates that suggests that the commodity currencies are susceptible to a pullback versus the US Dollar.

Central Banks Yet to Heat Up

The first week of January is typically a quiet start to a new year for central banks, typically with little planned outside of a speech here or a minutes release there. 2021 has been par for the course, with the December FOMC meeting minutes arriving yesterday amid a slew of speeches from Federal Reserve policymakers.

Elsewhere around the world, it’s been mostly quiet. No speeches have been made by anyone at the Bank of Canada, Reserve Bank of Australia, or Reserve Bank of New Zealand, nor have any meeting minutes been released in recent days. Unfortunately, activity is unlikely to get more exciting for the BOC, RBA, or RBNZ either, with the calendar clear for the next week too. But rates markets remain active, and each of the central banks tied to the commodity currencies (AUD, CAD, NZD) have seen rate cut odds dissipate for 2021.

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

Bank of Canada Looks to 2023

For the past several months, 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.” Recall that 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 (JANUARY 7, 2021) (Table 1)

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

Accordingly, neither interest rate cut nor hike expectations have produced any significant movement since the remarks made last month by BOC Governor Macklem. Through December 2021, there is only a 7% chance of a 25-bps rate cut by the BOC. Having previously dismissed the possibility of negative interest rates, this seems like a non-issue for the Canadian Dollar.

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IG Client Sentiment Index: USD/CAD Rate Forecast (JANUARY 7, 2021) (Chart 1)

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

USD/CAD: Retail trader data shows 67.29% of traders are net-long with the ratio of traders long to short at 2.06 to 1. The number of traders net-long is 13.15% higher than yesterday and 11.49% higher from last week, while the number of traders net-short is 0.82% higher than yesterday and 23.91% 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 Stuck Between a Rock and an AUD Place

The RBA has yet to produce meaningful commentary in 2021. The outlook from the end of 2020 remains valid: “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 (JANUARY 7, 2021) (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.”

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IG Client Sentiment Index: AUD/USD Rate Forecast (JANUARY 7, 2021) (Chart 2)

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

AUD/USD: Retail trader data shows 46.38% of traders are net-long with the ratio of traders short to long at 1.16 to 1. The number of traders net-long is 14.20% higher than yesterday and 74.09% higher from last week, while the number of traders net-short is 9.26% lower than yesterday and 13.74% lower 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.

Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current AUD/USD price trend may soon reverse lower despite the fact traders remain net-short.

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Reserve Bank of New Zealand Backs Away from Negative Rates

The RBNZ is like the RBA, insofar as it has not yet met or produced any commentary in 2021. Our end of year observation regarding the RBNZ’s push to negative interest rates remains valid – they’re not happening. “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 (JANUARY 7, 2021) (Table 3)

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

As such, New Zealand overnight index swaps (OIS) are discounting only a 16% chance of a rate cut by mid-year, and a 25% chance overall that interest rates could dip to 0% by the last policy meeting of the year. The most likely scenario is that that the main rate will remain at its current level into at least February 2022.

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IG Client Sentiment Index: NZD/USD Rate Forecast (JANUARY 7, 2021) (Chart 3)

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

NZD/USD: Retail trader data shows 37.06% of traders are net-long with the ratio of traders short to long at 1.70 to 1. The number of traders net-long is 7.95% higher than yesterday and 47.67% higher from last week, while the number of traders net-short is 4.35% lower than yesterday and 7.46% 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.

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