Central Bank Watch: BOC, RBA, & RBNZ Interest Rate Expectations Update
Central Bank Watch Overview:
- Rising bond yields and appreciating currencies are front-and-center for the commodity currency central banks.
- The RBA was the first of the three commodity currency central banks to meet since the jump in bond yields began, and provided clear guidance that their main rate will not be lifted anytime soon.
- Retail trader positioning indicates that suggests bullish biases for each of AUD/USD, NZD/USD, and USD/CAD rates.
Yield Spike Attracts Central Bank Attention
In this edition of Central Bank Watch, we’re examining the rates markets around the Bank of Canada, Reserve Bank of Australia, and Reserve Bank of New Zealand. All three central banks have met at least once this year, but only one – the RBA – has convened since the spike in global bond yields last week. The BOC will meet next week, and the RBNZ will be back in April.
But the fact remains that all three central banks are contending with the fact that rising global growth expectations and an aggressively dovish Federal Reserve are pushing investors into higher yielding assets. The BOC, RBA, and RBNZ will likely have to step up measures to prevent their currencies from further runaway appreciation – which might prove difficult, if not impossible.
For more information on central banks, please visit the DailyFX Central Bank Release Calendar.
Bank of Canada on Hold, but Seat Getting Hot
The BOC meets for the second time this year next week, and in the interim period, the Canadian Dollar has been mostly rangebound. At the January meeting, BOC Governor Tiff Macklem noted that “we’ve seen this broad-based US dollar depreciation that doesn’t reflect some positive development in Canada that the exchange rate is absorbing…the exchange rate is starting to create a material headwind for the Canadian economy.”
Rising bond yields may be changing the equation for the BOC, but USD/CAD rates may be beyond the BOC’s influence, as Governor Macklem conceded in January, when “in a situation where our Canada-U.S. exchange rate is moving largely because of made-in-U.S. developments as opposed to made-in-Canada developments.”
Bank of Canada Interest Rate Expectations (MARCH 2, 2021) (Table 1)
Interest rate expectations have started to move around more materially, but that’s largely due to the volatility seen in rates markets generally. Looking through the noise for the signal, it’s worth noting that the trend has only shifted marginally over the past two weeks: in late-February, there was a 16% chance of a 25-bps rate cut by the BOC by December 2021. Now, Canada overnight index swaps (OIS) are pricing in a 23% chance of a 25-bps rate hike through the end of the year.
IG Client Sentiment Index: USD/CAD Rate Forecast (MARCH 2, 2021) (Chart 1)
USD/CAD: Retail trader data shows 59.88% of traders are net-long with the ratio of traders long to short at 1.49 to 1. The number of traders net-long is 13.90% higher than yesterday and 21.72% lower from last week, while the number of traders net-short is 0.21% higher than yesterday and 63.73% 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 Must Do More
The RBA had a quiet first meeting of 2021, but a much more exciting second meeting of the year. Amid a sharp rise in Australian bond yields – at its peak, the 10-year was up by nearly 100-bps from the start of the year – the RBA has had to reassert its primacy over the bond market, insisting that it would not raise rates until wage growth accelerated. After all, it was just in November that RBA policymakers adjusted their mandate to have a greater focus on actual labor market outcomes (e.g. the unemployment rate) rather than expected inflation.
RESERVE BANK OF AUSTRALIA INTEREST RATE EXPECTATIONS (MARCH 2, 2021) (TABLE 2)
Despite the rise in Australian bond yields, market participants don’t seem convinced that the RBA will cave in on their yield curve control efforts to keep the main rate at its current level or lower through at least March 2023. According to Australia overnight index swaps, there is a 11% 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.
IG Client Sentiment Index: AUD/USD Rate Forecast (MARCH 2, 2021) (Chart 2)
AUD/USD: Retail trader data shows 54.67% of traders are net-long with the ratio of traders long to short at 1.21 to 1. The number of traders net-long is 0.23% higher than yesterday and 50.40% higher from last week, while the number of traders net-short is 12.47% higher than yesterday and 31.77% 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.
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 AUD/USD trading bias.
Reserve Bank of New Zealand Has Yet to Meet
The RBNZ met for the first time last week, but the big news was around the change in the RBNZ’s remit: no longer solely focused on inflation, housing prices will not be considered. For the past few months, we’ve noted that “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.” If anything, the change in the RBNZ’s remit make a more hawkish interest rate hike cycle more likely in emerging sooner.
RESERVE BANK OF NEW ZEALAND INTEREST RATE EXPECTATIONS (MARCH 2, 2021) (Table 3)
Accordingly, New Zealand overnight index swaps (OIS) are discounting a 2% chance of a rate hike by mid-year, and a 26% chance that the main rate will rise by 25-bps by the last policy meeting of the year. This is a meaningful shift, as just two weeks ago rates markets were pricing in a 9% chance of a cut in the main rate to zero. While it still seems that the main rate will remain at its current level into at least February 2022, and the RBNZ is clearly the only major central bank with a rate hike on its radar.
IG Client Sentiment Index: NZD/USD Rate Forecast (MARCH 2, 2021) (Chart 3)
NZD/USD: Retail trader data shows 42.74% of traders are net-long with the ratio of traders short to long at 1.34 to 1. The number of traders net-long is 13.33% higher than yesterday and 21.91% higher from last week, while the number of traders net-short is 12.64% higher than yesterday and 18.00% 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.