Central Bank Watch: BOC, RBA, & RBNZ Interest Rate Expectations Update
Central Bank Watch Overview:
- Omicron variant concerns aren’t weighing significantly on expected rate moves; all three central banks covered in this report are still expected to hike their main rates in the first half of 2022.
- The most hawkish of the central banks in this report, the Reserve Bank of New Zealand, is expected to hike rates at all but one of its 2022 meetings.
- Retail trader positioning suggests that the near-term outlook is varied among the trio of major commodity currencies.
Omicron Variant Ruffles Feathers
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. The emergence of the omicron variant is provoking some cause for concern, but evidently not enough for rates markets to diminish the possibility that all three central banks covered in this report will raise their main rates in the first half of 2022.
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BOC Downplays Omicron
The Bank of Canada didn’t surprise anyone earlier this month when it left its previous forward guidance remained in place, hinting at tightening in early-2022. The central bank has offered a bit more commentary in recent days surrounding omicron variant concerns, more or less downplaying the impact on the path of interest rates next year. Noting that the omicron variant spread may prove short-lived, the bigger issue is the potential impact on supply chain disruptions – which have already boosted inflation to uncomfortable levels.
Bank of Canada Interest Rate Expectations (December 21, 2021) (Table 1)
After the December BOC rate decision, rates markets were discounting a 100% chance of a 25-bps rate hike in March, and a 13% chance of a 50-bps hike. Perhaps thanks in part to the sharp decline in oil prices since late-November – energy accounts for 11% of Canadian GDP – Canada overnight swaps are now pricing in a 50% chance of the first 25-bps rate hike arriving in March 2022. However, rates markets are aggressive in the first half of 2022; should the BOC choose not to raise rates in March, April has priced in a 100% chance of a 25-bps rate hike and a 66% chance of a 50-bps rate hike.
IG Client Sentiment Index: USD/CAD Rate Forecast (December 21, 2021) (Chart 1)
USD/CAD: Retail trader data shows 35.18% of traders are net-long with the ratio of traders short to long at 1.84 to 1. The number of traders net-long is 4.48% lower than yesterday and 8.78% lower from last week, while the number of traders net-short is 13.44% higher than yesterday and 25.40% higher from last week.
Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USD/CAD-bullish contrarian trading bias.
RBA Overlooks Omicron, Too
The Reserve Bank of Australia’s December meeting minutes revealed a strong preference to start tapering bond purchases beginning in February 2022, ending its bond buying by May 2022. Australian economic data has been steadily improving in recent months, so much so that the current Australian unemployment rate of 4.6% is quickly approaching the RBA’s 2022 year-end forecast of 4.2%. When the RBA meets in February for its first policy meeting of 2022, it is likely that a new round of upgrades are brought forth for the labor market, the inflation outlook, and growth expectations – regardless of the headlines around the omicron variant.
RESERVE BANK OF AUSTRALIA INTEREST RATE EXPECTATIONS (December 21, 2021) (TABLE 2)
Even as omicron variant concerns rage in the news, the fact is that rates markets are more sensitive to realized Australian economic data. As such, over the past two weeks, Australia overnight index swaps have become more hawkish, insofar as the odds of a 25-bps rate hike at the June 2022 meeting have increased from 55% to 66%.
IG Client Sentiment Index: AUD/USD Rate Forecast (DECEMBER 21, 2021) (Chart 2)
AUD/USD: Retail trader data shows 68.00% of traders are net-long with the ratio of traders long to short at 2.13 to 1. The number of traders net-long is 3.17% higher than yesterday and 4.69% higher from last week, while the number of traders net-short is 7.77% higher than yesterday and 21.64% 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.
Market Backing Off RBNZ Hike Path
The Reserve Bank of New Zealand still has the most aggressive interest rate path expected by markets in 2022. However, with New Zealand seeing rising COVID-19 infections and a looming omicron variant threat, rates markets have become ever-so-slightly less aggressive with their expectations for RBNZ rates in 2022. Still, there is a lot of room for disappointment if the RBNZ doesn’t meet expectations for what would still be the quickest pace of rate hikes by any major central bank in the post-Global Financial Crisis era.
RESERVE BANK OF NEW ZEALAND INTEREST RATE EXPECTATIONS (DECEMBER 21, 2021) (Table 3)
Rates markets are now discounting a 100% chance of a 25-bps rate hike at the February 2022 RBNZ meeting, with a 20% chance of a 50-bps hike, down from a 30% chance of a 50-bps hike in February earlier this month. Our point of view remains that “it may be the case that RBNZ rate hike pricing is an albatross around the Kiwi’s neck for the foreseeable future,” particularly if they don’t hike rates at all but one meeting in 2022.
IG Client Sentiment Index: NZD/USD Rate Forecast (DECEMBER 21, 2021) (Chart 3)
NZD/USD: Retail trader data shows 69.81% of traders are net-long with the ratio of traders long to short at 2.31 to 1. The number of traders net-long is 1.68% lower than yesterday and 8.97% lower from last week, while the number of traders net-short is 11.60% higher than yesterday and 6.05% 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.
Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current NZD/USD price trend may soon reverse higher despite the fact traders remain net-long.
--- Written by Christopher Vecchio, CFA, Senior Strategist
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.