SAGGING COMMODITY PRICES DON’T MATTER MUCH

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. Despite a slump in commodity prices in recent weeks – from copper to oil, to wheat – multi-decade highs in inflation rates continue to provoke speculation that major central banks will continue to raise rates rapidly in the coming months. Each of the Bank of Canada, the Reserve Bank of Australia, and the Reserve Bank of New Zealand are expected to hike their main rates by at least 50-bps in July.

75-BPS HIKE INCOMING?

Price pressures continue to rise in Canada, despite strong action by the Bank of Canada in recent weeks to tamp down a rapid rise in the cost of living. The BOC’s June policy statement included the phrase “the Governing Council is prepared to act more forcefully if needed to meet its commitment to achieve the 2% inflation target,” and rates markets believe more aggressive tightening is on the horizon when policymakers meet in mid-July.

BANK OF CANADA INTEREST RATE EXPECTATIONS (JUNE 21, 2022) (TABLE 1)

After the BOC’s 50-bps rate earlier this month, rates markets are expecting an accelerated pace of tightening immediately. Rate hike odds for the July meeting have surged higher in recent weeks: there is a 281% chance of a 25-bps rate hike (100% chance of a 25-bps rate hike, a 100% chance of a 50-bps rate hike, and an 81% chance of a 50-bps rate hike). Currently, at 1.50%, the BOC’s main rate is on pace to rise to 2.25% next month.

IG CLIENT SENTIMENT INDEX: USD/CAD RATE FORECAST (JUNE 21, 2022) (CHART 1)

USD/CAD: Retail trader data shows 31.52% of traders are net-long with the ratio of traders short to long at 2.17 to 1. The number of traders net-long is 11.08% lower than yesterday and 32.32% lower from last week, while the number of traders net-short is 8.09% higher than yesterday and 64.83% 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 MINUTES: EXPECT MORE HIKES

The June RBA meeting minutes strongly hinted at an aggressive pace of rate hikes moving forward after the RBA levied a surprise 25-bps rate hike in May and a 50-bps rate hike earlier this month. RBA Governor Philip Lowe recently said that another 50-bps rate hike should be expected in July, as the Australian economy continues to see an incredibly strong labor market with minimal concerns about a recession materializing in the coming months.

RESERVE BANK OF AUSTRALIA INTEREST RATE EXPECTATIONS (JUNE 21, 2022) (TABLE 2)

According to Australia overnight index swaps (OIS), there is a 175% chance of a 25-bps rate hike in July (100% chance of a 25-bps rate hike and a 75% chance of a 50-bps rate hike). But the aggressive shift in RBA rate hike odds is best reflected when looking to the end of 2022: in April, the RBA’s main rate set was expected to rise to 2.00% by the end of the year; the terminal rate is now discounted at 3.566%.

IG CLIENT SENTIMENT INDEX: AUD/USD RATE FORECAST (JUNE 21, 2022) (CHART 2)

AUD/USD: Retail trader data shows 70.15% of traders are net-long with the ratio of traders long to short at 2.35 to 1. The number of traders net-long is 7.55% higher than yesterday and 7.89% higher from last week, while the number of traders net-short is 4.75% lower than yesterday and 11.15% 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 STILL NOT DONE

The Reserve Bank of New Zealand has been on a rate hike warpath through the first six months of 2022, and more aggressive tightening is expected moving forward – even as economic data continues to deteriorate. A reminder, the RBNZ monetary policy remit is not just about inflation, but about house prices too. Not only is the RBNZ expected to raise rates at every meeting through February 2023, but the pace of rate hikes is expected to accelerate moving forward.

RESERVE BANK OF NEW ZEALAND INTEREST RATE EXPECTATIONS (JUNE 21, 2022) (TABLE 3)

There is a 213% chance that the RBNZ raises rates by 25-bps next month (a 100% chance of a 25-bps rate hike, a 100% chance of a 50-bps rate hike, and an 18% chance of a 75-bps rate hike) followed by a 270% of a 25-bps rate hike in August (a 100% chance of a 25-bps rate hike, a 100% chance of a 50-bps rate hike, and a 70% chance of a 75-bps rate hike). Current pricing suggests that the RBNZ’s main rate will rise from 2.00% to 3.25% before the calendar hits September.

IG CLIENT SENTIMENT INDEX: NZD/USD RATE FORECAST (JUNE 21, 2022) (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 unchanged than yesterday and 16.84% higher from last week, while the number of traders net-short is 7.46% higher than yesterday and 23.81% 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.