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

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

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Central Bank Watch Overview:

  • The Reserve Bank of Australia hiked rates by 50-bps this week, but additional 50-bps rate hikes appear less likely moving forward.
  • The September Bank of Canada rate decision could produce a 100-bps rate hike; beyond there, however, questions linger about the BOC’s commitment to additional rate hikes.
  • Retail trader positioning suggests that AUD/USD rates have a bearish bias, NZD/USD rates have a neutral bias, and USD/CAD rates have a bullish bias.

Nearing the End?

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 RBNZ is expected to remain aggressive in light of recent comments from a key policymaker. It’s a different story for the BOC and RBA as their main rates rise above neutral and growth concerns come into greater focus.

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

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BOC Almost Done Front-Loading

After raising their main rate by 100-bps in July – the largest such increase since August 1998 – questions lingered about whether or not the BOC would continue with an aggressive rate hike path. Those questions may have been answered last month, when the July Canada inflation report (CPI) showed signs of decelerating price pressures. Considering the BOC has suggested it is front-loading rate hikes, soft forward guidance may ultimately weigh on the Canadian Dollar after the September BOC meeting.

Bank of Canada Interest Rate Expectations (September 6, 2022) (Table 1)

According to Canada overnight index swaps (OIS), rates markets are discounting an 82% chance of a 100-bps rate hike in September (a 100% chance of a 25-bps rate hike, a 100% chance of a 50-bps rate hike, a 100% chance of a 75-bps rate hike, and an 82% chance of a 100-bps rate hike), and are favoring another 50-bps of rate hikes by the end of the year. Rates markets are estimating the BOC’s main rate to rise to 3.747% by the end of 2022, up from the projected terminal rate of 3.663% discounted one month ago.

IG Client Sentiment Index: USD/CAD Rate Forecast (September 6, 2022) (Chart 1)

USD/CAD: Retail trader data shows 41.05% of traders are net-long with the ratio of traders short to long at 1.44 to 1. The number of traders net-long is 4.46% lower than yesterday and 1.83% lower from last week, while the number of traders net-short is 1.07% lower than yesterday and 19.43% 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 Rate Hike Pace to Slow

With Australian inflation rates continuing to climb, the RBA met expectations by raising rates for the fifth consecutive time at the September meeting this week, in what was the fourth consecutive 50-bps rate hike. But having dropped language suggesting that interest rate policy was normalizing, it stands to reason that the RBA has taken a less hawkish tone than anticipated. If the RBA raises rates over the coming months, it appears increasingly likely that the cadence will be at 25-bps moving forward.

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RESERVE BANK OF AUSTRALIA INTEREST RATE EXPECTATIONS (September 6, 2022) (TABLE 2)

According to Australia overnight index swaps (OIS), there is a 22% chance of a 50-bps rate hike in October (100% chance of a 25-bps rate hike and a 22% chance of a 50-bps rate hike). Rates markets are priced such that the RBA will bring its main rate to 3.259% by the end of 2022, which means 25-bps rate hikes at each of the October, November, and December meetings. There is an outside chance that the RBA raises rates by 50-bps in either November or December.

IG Client Sentiment Index: AUD/USD Rate Forecast (September 6, 2022) (Chart 2)

AUD/USD: Retail trader data shows 70.54% of traders are net-long with the ratio of traders long to short at 2.39 to 1. The number of traders net-long is 6.97% higher than yesterday and 40.73% higher from last week, while the number of traders net-short is 2.09% lower than yesterday and 17.03% 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.

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RBNZ Remains Aggressive

The RBNZ does not meet in September, and to an extent, rates markets haven’t changed their expectations in recent weeks. In August, the RBNZ revised its expectation for the main rate in 2023 from 3.70% to 4.10% by 2Q’23. In recent weeks, RBNZ Deputy Governor Christian Hawkesby said that policymakers want to bring the main rate “comfortably above neutral” in order to help reduce inflation pressures (which stood at +7.3% y/y as of 2Q’22).

RESERVE BANK OF NEW ZEALAND INTEREST RATE EXPECTATIONS (September 6, 2022) (Table 3)

According to New Zealand overnight index swaps, there is a 91% chance that the RBNZ raises rates by 50-bps when they meet in October (a 100% chance of a 25-bps rate hike and a 91% chance of a 50-bps rate hike). Moreover, another 50-bps rate hike is discounted for November, the final RBNZ meeting of 2022. In response to RBNZ Deputy Governor Hawkesby’s comments, markets are now discounting the overnight cash rate (OCR) to rise to 3.927% by the end of 2022, up from an expected 3.88% as discounted last month.

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IG Client Sentiment Index: NZD/USD Rate Forecast (September 6, 2022) (Chart 3)

NZD/USD: Retail trader data shows 65.84% of traders are net-long with the ratio of traders long to short at 1.93 to 1. The number of traders net-long is 0.31% higher than yesterday and 8.84% higher from last week, while the number of traders net-short is 5.73% higher than yesterday and 3.49% 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.

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 NZD/USD trading bias.

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--- Written by Christopher Vecchio, CFA, Senior Strategist

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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