Central Bank Watch Overview:
- With the COVID-19 delta variant continuing to plague major economies, rate hike odds have shifted dramatically in the past 24-hours – particularly for the RBNZ.
- If RBNZ Governor Adrian Orr decides to surprise markets without a rate hike, then several may be coming down the pipeline in quick succession later this year.
- Retail trader positioning suggests that the near-term outlook is bearish for the trio of major commodity currencies.
Central Banks Blink
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. We have the RBNZ on the immediate event horizon, while both the RBA and BOC won’t be meeting again until September. With the COVID-19 delta variant continuing to plague major economies, rate hike odds have shifted dramatically in the past 24-hours – particularly for the RBNZ.
For more information on central banks, please visit the DailyFX Central Bank Release Calendar.
Bank of Canada Stimulus Withdrawal Proceeding
A strong labor market and persistent inflation readings above the BOC’s mandate – as well as the fact that the BOC projects inflation above its mandate for the next several years – has already pushed Canadian policymakers to its QE program of C$1 billion, bringing its asset purchases to C$2 billion per week, as of its July meeting.
Beyond that, BOC Governor Tiff Macklem has suggested that ‘everything is under control’ with respect to elevated inflation readings, suggesting that no moves are expected on the immediate horizon.
Bank of Canada Interest Rate Expectations (August 17, 2021) (Table 1)
In line with previous efforts, the BOC has made clear it is content with its decision to taper, but it remains the case that further action along the interest rate channel remains highly unlikely. According to Canada overnight index swaps, there is a 4% chance of a 25-bps rate hike by the end of 2021, with the greatest chance of a 25-bps rate hike coming in July 2022.
IG Client Sentiment Index: USD/CAD Rate Forecast (August 17, 2021) (Chart 1)
USD/CAD: Retail trader data shows 60.42% of traders are net-long with the ratio of traders long to short at 1.53 to 1. The number of traders net-long is 6.32% lower than yesterday and 6.87% lower from last week, while the number of traders net-short is 12.93% higher than yesterday and 12.69% 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.
Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current USD/CAD price trend may soon reverse higher despite the fact traders remain net-long.
Reserve Bank of Australia Looks Indecisive
The Reserve Bank of Australia remains divergent from its counterparts, with the Federal Reserve hinting on stimulus withdrawal, and both the Bank of Canada and the Reserve Bank of New Zealand clearly on the stimulus withdrawal path. While a few weeks ago it appeared that the RBA was moving closer towards some winddown of stimulus – the August meeting produced a slight trim to the QE program, from A$5 billion per week to A$4 billion per week – comments made over the past 24-hours suggest that the end of stimulus is further way than previously anticipated.
RESERVE BANK OF AUSTRALIA INTEREST RATE EXPECTATIONS (August 17, 2021) (TABLE 2)
The August RBA minutes noted that “the Board would be prepared to act in response to further bad news on the health front should that lead to a more significant setback for the economic recovery.” According to Australia overnight index swaps, there is a 38% chance of a rate cut through December 2021, up from 26% this time last week.
IG Client Sentiment Index: AUD/USD Rate Forecast (AUGUST 17, 2021) (Chart 2)
AUD/USD: Retail trader data shows 65.61% of traders are net-long with the ratio of traders long to short at 1.91 to 1. The number of traders net-long is 2.54% higher than yesterday and 8.31% higher from last week, while the number of traders net-short is 2.47% lower than yesterday and 17.73% 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.
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.
RBNZ Ready to Shock and Orr?
The weeks since the July RBNZ policy continued to produce several strong economic data reports, and it now appears the New Zealand economy has progressed far enough to warrant discussions around a rate hike. Or has it? Over the past 24-hours, thanks to a singular new case of COVID-19, New Zealand is enacting a “level four lockdown,” its most restrictive lockdown possible. Yesterday, a 25-bps rate hike was fully priced in by the market, with an 18% chance of a 50-bps rate hike.
RESERVE BANK OF NEW ZEALAND INTEREST RATE EXPECTATIONS (AUGUST 17, 2021) (Table 3)
Now, according to overnight index swaps for New Zealand, there is a 0% chance of a 50-bps rate hike, and a 77% chance of 25-bps rate hike. To be clear, the New Zealand OIS curve is still very hawkish, and the New Zealand Dollar retains the mantle of having the most hawkish central bank among the major currencies. If RBNZ Governor Adrian Orr decides to surprise markets without a rate hike, then several may be coming down the pipeline in quick succession later this year.
IG Client Sentiment Index: NZD/USD Rate Forecast (AUGUST 17, 2021) (Chart 3)
NZD/USD: Retail trader data shows 62.34% of traders are net-long with the ratio of traders long to short at 1.66 to 1. Our data shows traders are now at their most net-long NZD/USD since Jul 20 when NZD/USD traded near 0.69. The number of traders net-long is 49.17% higher than yesterday and 34.12% higher from last week, while the number of traders net-short is 22.22% lower than yesterday and 26.02% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests NZD/USD prices may continue to fall.
Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger NZD/USD-bearish contrarian trading bias.
--- Written by Christopher Vecchio, CFA, Senior Strategist
