CENTRAL BANKS HOLDING THE LINE

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. Now halfway through April, we’ve had the RBA and RBNZ meet, and we still have the BOC ahead next week. A trend has started to emerge, however. Ongoing stability in global bond yields has helped provoked a drop in early rate hike expectations among the three commodity currency central banks.

BANK OF CANADA MEETS NEXT WEEK

The BOC meets next week for its April policy meeting. Like for the RBA and RBNZ thus far this month, it seems prudent to expect further pushback against the recent rise in global bond yields, with ensuing commentary expected to heap praise on stability in interest rates over the intermeeting period. Even as BOC Governor Tiff Macklem has noted concern about rapidly rising house prices, rates markets aren’t seeing a future where the BOC sees its objectives changed anytime soon.

BANK OF CANADA INTEREST RATE EXPECTATIONS (APRIL 14, 2021) (TABLE 1)

The ebb and flow of BOC interest rate expectations is not atypical. Even though just last week there was a 2% chance of a 25-bps rate hike through the end of the year, Canada overnight index swaps are now pricing in an 18% chance. But in late-February, markets were pricing in a 16% chance of a rate hike by the end of the year. All-in-all, the BOC remains on the same path its been, and will remain on that path for the foreseeable future.

IG CLIENT SENTIMENT INDEX: USD/CAD RATE FORECAST (APRIL 14, 2021) (CHART 1)

USD/CAD: Retail trader data shows 68.83% of traders are net-long with the ratio of traders long to short at 2.21 to 1. The number of traders net-long is 15.11% higher than yesterday and 30.76% higher from last week, while the number of traders net-short is 20.23% lower than yesterday and 19.30% lower 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.

Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USD/CAD-bearish contrarian trading bias.

RESERVE BANK OF AUSTRALIA PUSHBACK SUCCEEDS

The RBA meet during the first week of April, and it remains the case that the impact of its prior efforts are still being realized in financial markets. Following Australian government 10-year bond yields opening the year at 0.994% and climbing 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. Bond markets have been responsive: the Australian government 10-year yield is currently 1.703%.

RESERVE BANK OF AUSTRALIA INTEREST RATE EXPECTATIONS (APRIL 14, 2021) (TABLE 2)

As noted previously, “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 17% chance of a rate cut through December 2021, up from 15% last week.

IG CLIENT SENTIMENT INDEX: AUD/USD RATE FORECAST (APRIL 14, 2021) (CHART 2)

AUD/USD: Retail trader data shows 47.17% of traders are net-long with the ratio of traders short to long at 1.12 to 1. The number of traders net-long is 15.51% lower than yesterday and 12.14% lower from last week, while the number of traders net-short is 6.85% higher than yesterday and 8.45% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests AUD/USD 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 AUD/USD-bullish contrarian trading bias.

RESERVE BANK OF NEW ZEALAND ODDS FALL

The RBNZ finished its April policy meeting yesterday against a backdrop of explosive house price growth in recent months: the house prices were up by over +20% y/y in January (this, of course, is now a consideration to their policy remit). And while RBNZ officials have taken housing price data into consideration, the recent OCR statement suggests that forthcoming house price growth will be more modest. To this end, asset purchases are expected to continue through June.

RESERVE BANK OF NEW ZEALAND INTEREST RATE EXPECTATIONS (APRIL 14, 2021) (TABLE 3)

Against the backdrop of more modest house price growth forecasts, New Zealand overnight index swaps are now pricing in a 1% chance of a rate cut by mid-year, and a 4% chance that the main rate will rise by 25-bps by the last policy meeting of the year. This is a minor shift from last week, when pricing called for 0% and 14%, respectively. Concurrent with the summary from last week, “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.”

IG CLIENT SENTIMENT INDEX: NZD/USD RATE FORECAST (APRIL 14, 2021) (CHART 3)

NZD/USD: Retail trader data shows 39.97% of traders are net-long with the ratio of traders short to long at 1.50 to 1. The number of traders net-long is 12.30% lower than yesterday and 10.86% lower from last week, while the number of traders net-short is 12.10% lower than yesterday and 6.27% higher 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.

Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger NZD/USD-bullish contrarian trading bias.