Central Bank Watch Overview:
- As the rise in global bond yields has steadied in recent weeks, nascent rate hike expectations have cooled off at each of the commodity currency central banks.
- The drop in rate hike expectations is in line with otherwise clear guidance that BOC, RBA, and RBNZ main rates will remain on hold for the foreseeable future.
- Retail trader positioningsuggests that the near-term outlook is choppy for the commodity currencies.
Central Bank Push Back Working, For Now
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. For April, we get each of the commodity currency central banks in three successive weeks.
Over the course of their first few meetings, each central bank has complained about the strength of their local currency to no avail, but have each achieved varying degrees of success with talking down the rise in global bond yields. With the RBA’s meeting in the rearview mirror, attention turns to the RBNZ (April 14) and the BOC (April 21).
For more information on central banks, please visit the DailyFX Central Bank Release Calendar.
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Bank of Canada Expectations Ease
BOC Governor Tiff Macklem drew attention last week when he noted concern about rapidly rising house prices and their deleterious impact in the future, with comparisons made to the RBNZ and its shift in remit with respect to the housing market. And even as January Canadian housing data showed that prices were up by about +7% y/y (nothing compared to New Zealand’s +20% y/y rate in January), rates markets aren’t seeing a future where the BOC sees its objectives changed.
Bank of Canada Interest Rate Expectations (APRIL 6, 2021) (Table 1)
In fact, there has been a significant swing in BOC rate expectations towards keeping the ship steady through the end of the year. In late-February, there was a 16% chance of a 25-bps rate cut by the BOC by December 2021. In early-March, Canada overnight index swaps (OIS) were pricing in a 23% chance of a 25-bps rate hike through the end of the year. Now, there is a 2% chance.
IG Client Sentiment Index: USD/CAD Rate Forecast (APRIL 6, 2021) (Chart 1)
USD/CAD: Retail trader data shows 52.16% of traders are net-long with the ratio of traders long to short at 1.09 to 1. The number of traders net-long is 4.25% lower than yesterday and 6.05% lower from last week, while the number of traders net-short is 28.20% higher than yesterday and 44.70% 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.
Read more: Canadian Dollar Forecast: Loonie Maintains Bullish Flight Path – Setups in CAD/JPY, USD/CAD
Reserve Bank of Australia Succeeding in Pushing Back
The RBA has already convened for its April meeting, but the impact of its prior efforts are still being realized. After the Australian government 10-year bond yield opened the year at 0.994% and climbed to a closing high of 1.894% on February 26, the RBA has taken a concerted effort to slow the rise in long-end yields by promising to amend its bond buying program while outlining clear forward guidance for keeping interest rates low. Accordingly, interest rates markets have responded – as have long-end yields: the Australian 10-year yield currently stands at 1.735%.
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RESERVE BANK OF AUSTRALIA INTEREST RATE EXPECTATIONS (APRIL 6, 2021) (TABLE 2)
As noted many times, “despite the rise in Australian bond yields, market participants don’t seem convinced that the RBA will cave in on their yield curve control efforts to keep the main rate at its current level or lower through at least March 2023.” This is more true today than in the past: according to Australia overnight index swaps, there is a 15% chance of a rate cut through December 2021, up from 11% in early-March. Or, in other words, the odds of a rate hike have dropped by another -4%.
IG Client Sentiment Index: AUD/USD Rate Forecast (APRIL 6, 2021) (Chart 2)
AUD/USD: Retail trader data shows 52.08% of traders are net-long with the ratio of traders long to short at 1.09 to 1. The number of traders net-long is 2.94% higher than yesterday and 0.16% higher from last week, while the number of traders net-short is 2.26% higher than yesterday and 4.00% 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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Reserve Bank of New Zealand Leans Less Hawkish
The RBNZ meets again next week, just a few meetings removed from the change in remit that no longer is solely focused on inflation, with housing prices now weighed. Even though the New Zealand housing market is on fire, with house prices up by over +20% y/y in January, the RBNZ itself does not appear prepared to change its tune on its low rate regime just yet. In fact, with global bond yields – New Zealand government bond yields included – coming down and stabilizing in recent weeks, markets have become less anticipatory regarding direct action in the interest rate channel.
RESERVE BANK OF NEW ZEALAND INTEREST RATE EXPECTATIONS (APRIL 6, 2021) (Table 3)
Accordingly, New Zealand overnight index swaps (OIS) are now pricing in a 0% chance of a rate hike by mid-year, and a 14% chance that the main rate will rise by 25-bps by the last policy meeting of the year. This is a small but meaningful change, as in early-March the mid-year and year-end rate hike odds stood at 2% and 24%. Even though the RBNZ is the only major central bank with a rate hike on its radar for 2021, it seems less likely that they’ll act.
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IG Client Sentiment Index: NZD/USD Rate Forecast (APRIL 6, 2021) (Chart 3)
NZD/USD: Retail trader data shows 50.22% of traders are net-long with the ratio of traders long to short at 1.01 to 1. The number of traders net-long is 5.22% lower than yesterday and 15.65% lower from last week, while the number of traders net-short is 2.40% higher than yesterday and 7.07% 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 Currency Strategist
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