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BOC, RBA, & RBNZ Interest Rate Expectations Update


Central Bank Watch Overview:

  • After the Canadian federal election, and on the heels of a surge in energy prices, rate hike odds have been pulled forward for the BOC.
  • Rate hike odds have eased back for both the RBA and RBNZ ahead of the their October meetings next week.
  • Retail trader positioningsuggests that the near-term outlook is mostly bearish for the trio of major commodity currencies.

Central Bank Shuffle

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. While the RBNZ has already blinked and backed away from tightening measures until at least October, it appears that the RBA and BOC having been facing down similar decisions. True, the RBA did just announce an alteration to its QE program – more on that shortly. For the BOC, which has its September policy meeting on the immediate horizon, a test of its commitment to stimulus withdrawal is on deck.

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

Bank of Canada Stimulus Withdrawal to Restart

Now that the Canadian federal election has passed, and with inflation rates running above expectations, it seems likely that the Bank of Canada will soon restart its stimulus withdrawal efforts as soon as it meets in October. Currently, asset purchases are running at a rate of C$2 billion per week. And now that energy prices are surging – energy accounts for approximately 11% of Canadian GDP – there is reason to believe there is less slack in the economy than previously anticipated.

Bank of Canada Interest Rate Expectations (September 30, 2021) (Table 1)

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

While a rate hike is still several months away, it does appear that a restart of stimulus withdrawal efforts have spurred some speculation that the BOC will act sooner than previously anticipated when the time to raise rates arrives. In early-September, there was a 59% chance of a 25-bps rate hike by June 2022. Now, on the last day of September, April is favored for the first 25-bps rate hike, with Canada overnight index swaps pricing in a 56% probability.

IG Client Sentiment Index: USD/CAD Rate Forecast (September 30, 2021) (Chart 1)

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

USD/CAD: Retail trader data shows 63.46% of traders are net-long with the ratio of traders long to short at 1.74 to 1. The number of traders net-long is 15.81% lower than yesterday and 0.12% higher from last week, while the number of traders net-short is 5.71% higher than yesterday and 22.49% 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’s ‘Lower for Longer’

The September Reserve Bank of Australia meeting produced a reduction in asset purchases A$3 billion per week but would also extend its QE program from November 2021 until February 2022. As trade tensions persist with China, its largest trading partner, and with Chinese property sector concerns plaguing industrial base metals, markets are assuming that the RBA will slow walk any further stimulus withdrawal efforts in the near-term.

RESERVE BANK OF AUSTRALIA INTEREST RATE EXPECTATIONS (September 30, 2021) (TABLE 2)

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

In early-September, there was a 29% chance of a 25-bps rate cut through December 2021. Even as Australian vaccination rates continue to rise, the ongoing pressure in commodity markets has neutralized any previous gains in rate hike expectations – however minor – over the course of the month. Now, according to Australia overnight index swaps, there is a 28% chance of a 25-bps rate hike through the end of the year – an insignificant change.

Nevertheless, the RBA had previously pledged that it would keep rates at their current level or lower for three years starting in March 2020, and with record levels of Australian Dollar shorts in the futures market, it may only take a small change in market conditions – either an improved trade relationship with China, a reduction in pressure in base metals, or the end of lockdowns – that could provoke a violent repricing in Australian rate odds, which could lead to a considerable short covering rally by the Aussie.

IG Client Sentiment Index: AUD/USD Rate Forecast (SEPTEMBER 30, 2021) (Chart 2)

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

AUD/USD: Retail trader data shows 60.45% 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 2.30% higher than yesterday and 4.95% higher from last week, while the number of traders net-short is 2.39% higher than yesterday and 8.71% 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 Spooked Again?

Recall in August, after New Zealand entered a “level four lockdown” in mid-August, rate hike odds plummeted for the Reserve Bank of New Zealand meeting set to convene the following day; the RBNZ ultimately did not hike rates. But soon after, markets were expecting the first 25-bps rate hike to arrive in October as it appeared that COVID-19 infections were slowing. Yet over the past 48-hours, with data emerging that New Zealand COVID-19 infections jumped to their highest level since June, markets are quickly downgrading their expectations that the RBNZ will raise rates when it meets next week.

RESERVE BANK OF NEW ZEALAND INTEREST RATE EXPECTATIONS (SEPTEMBER 30, 2021) (Table 3)

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

According to overnight index swaps for New Zealand, there is an 81% chance of a 25-bps rate hike when the RBNZ meets in a few days’ time. That is still heavily favoring a rate hike, but it is a meaningful pullback from the 100% odds that existed at the start of this past week. Markets remain adamant that a rate move will arrive by the end of the year, with New Zealand overnight index swaps pricing in a 190% chance of a 25-bps hike by the end of the year; that is, a 100% chance of a 25-bps rate hike and a 90% chance of 50-bps worth of hikes.

IG Client Sentiment Index: NZD/USD Rate Forecast (SEPTEMBER 30, 2021) (Chart 3)

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

NZD/USD: Retail trader data shows 64.61% of traders are net-long with the ratio of traders long to short at 1.83 to 1. The number of traders net-long is 20.22% higher than yesterday and 79.59% higher from last week, while the number of traders net-short is 13.62% lower than yesterday and 34.33% 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



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