Central Bank Watch: BOC, RBA, & RBNZ Interest Rate Expectations Update
Central Bank Watch Overview:
- Both the Bank of Canada and Reserve Bank of New Zealand hiked rates in March, and are expected to hike rates again in April.
- Meanwhile, the Reserve Bank of Australia is still waiting to rise rates until after Australian federal elections take place.
- Retail trader positioning suggests that each of AUD/USD, NZD/USD, and USD/CAD rates have different biases in the near-term.
Commodity Prices Rip Higher
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. Each of Australia, Canada, and New Zealand are countries whose terms of trade tend to benefit when commodity prices rise, underpinning their currencies’ resiliency during a period when volatility has roiled most risk assets. Disruptions to global supply chains will prove a negative for each of the countries’ growth outlooks, but the prospect of everlasting high inflation pressures will keep the BOC, RBA, and RBNZ on the rate hike path for the foreseeable future.
For more information on central banks, please visit the DailyFX Central Bank Release Calendar.
Data Improves, Oil Up
The Canadian economy has seen a stretch of better than expected data, with the Citi Economic Surprise Index for Canada sitting at +22.6. The incoming February Canada employment change and unemployment figures are expected to underscore this recent trend, with the latter figure due in at 6.2% from 6.5%. A surge in oil prices will likely help the Canadian trade balance, potentially offsetting a decline in consumption in overall growth figures. Against this backdrop, sustained decades-high Canadian inflation readings are likely to persist, keeping the Bank of Canada on the rate hike path over the next few months.
Bank of Canada Interest Rate Expectations (March 9, 2022) (Table 1)
Following the BOC’s 25-bps rate hike last week, rates markets are still predicting another one when they meet next in April. In fact, rate hike odds for the April meeting have edged higher in recent weeks: one month ago, there was a 123% chance of a 25-bps rate hike (100% chance of a 25-bps rate hike and a 23% chance of a 50-bps rate hike). Now, there is a 162% chance of a 25-bps rate hike. Currently at 0.50%, the BOC’s main rate is on pace to rise to 1.00% by mid-year.
IG Client Sentiment Index: USD/CAD Rate Forecast (March 9, 2022) (Chart 1)
USD/CAD: Retail trader data shows 46.10% of traders are net-long with the ratio of traders short to long at 1.17 to 1. The number of traders net-long is 8.39% lower than yesterday and 27.80% lower from last week, while the number of traders net-short is 3.32% higher than yesterday and 23.88% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USD/CAD 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 USD/CAD-bullish contrarian trading bias.
RBA Still on Course to Hike Rates Mid-Year
The Reserve Bank of Australia is still in a holding pattern as it waits for the federal elections to take place by May. Thereafter, against the backdrop where the Australian unemployment rate at 4.2% is already on-par with the RBA’s 2022 year-end forecast, the RBA is poised to raise rates quickly. Rising commodity prices will bolster inflation pressures during the interim period between now and June, warranting quick action once political obstacles are hurdled.
RESERVE BANK OF AUSTRALIA INTEREST RATE EXPECTATIONS (March 9, 2022) (TABLE 2)
The near-term path for RBA rate hike odds has been stable in recent weeks. One month ago, markets were pricing in a 78% chance of the first rate hike arriving in June. Now, while the first 15-bps rate hike is expected to arrive in June, odds have eased back immaterially to 68%. A 25-bps hike is expected in August (109% chance), a third hike in September (78% chance), a fourth hike in November (128% chance), and the fifth and final hike in December (100% chance).
IG Client Sentiment Index: AUD/USD Rate Forecast (MARCH 9, 2022) (Chart 2)
AUD/USD: Retail trader data shows 50.12% of traders are net-long with the ratio of traders long to short at 1.00 to 1. The number of traders net-long is 7.70% higher than yesterday and 20.31% higher from last week, while the number of traders net-short is 2.35% higher than yesterday and 21.60% 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 Stays Aggressive
The Reserve Bank of New Zealand’s first meeting of 2022 produced a 25-bps rate hike, as expected. The backdrop calls for consistent rate hikes over the coming months as well, particularly as New Zealand’s terms of trade have been bolstered thanks to rises in various commodities: dairy, lumber, and grains. The New Zealand unemployment rate is holding at multi-decade lows, inflation remains is at its highest level in 30-years, and house prices – the third rail of the RBNZ’s remit – are up by nearly +30% y/y (per the most recently available data).
RESERVE BANK OF NEW ZEALAND INTEREST RATE EXPECTATIONS (MARCH 9, 2022) (Table 3)
There is a 141% chance that the RBNZ raises rates by 25-bps in April (a 100% chance of a 25-bps rate hike and a 41% chance of a 50-bps rate hike) followed by a 331% of a 25-bps rate hike in May (a 100% chance of a 25-bps rate hike, a 100% chance of a 50-bps rate hike, and a 31% chance of a 75-bps rate hike). The RBNZ remains on pace to raise rates at every meeting in 2022, the quickest pace of rate hikes by any major central bank in the post-Global Financial Crisis era.
IG Client Sentiment Index: NZD/USD Rate Forecast (MARCH 9, 2022) (Chart 3)
NZD/USD: Retail trader data shows 40.38% of traders are net-long with the ratio of traders short to long at 1.48 to 1. The number of traders net-long is 10.53% higher than yesterday and 16.00% lower from last week, while the number of traders net-short is 0.29% higher than yesterday and 3.12% 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.
Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed NZD/USD trading bias.
--- Written by Christopher Vecchio, CFA, Senior Strategist
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