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

CENTRAL BANKS BLINK

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. We have the RBNZ on the immediate event horizon, while both the RBA and BOC won’t be meeting again until September. With the COVID-19 delta variant continuing to plague major economies, rate hike odds have shifted dramatically in the past 24-hours – particularly for the RBNZ.

BANK OF CANADA STIMULUS WITHDRAWAL PROCEEDING

A strong labor market and persistent inflation readings above the BOC’s mandate – as well as the fact that the BOC projects inflation above its mandate for the next several years – has already pushed Canadian policymakers to its QE program of C$1 billion, bringing its asset purchases to C$2 billion per week, as of its July meeting.

Beyond that, BOC Governor Tiff Macklem has suggested that ‘everything is under control’ with respect to elevated inflation readings, suggesting that no moves are expected on the immediate horizon.

BANK OF CANADA INTEREST RATE EXPECTATIONS (AUGUST 17, 2021) (TABLE 1)

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

In line with previous efforts, the BOC has made clear it is content with its decision to taper, but it remains the case that further action along the interest rate channel remains highly unlikely. According to Canada overnight index swaps, there is a 4% chance of a 25-bps rate hike by the end of 2021, with the greatest chance of a 25-bps rate hike coming in July 2022.

IG CLIENT SENTIMENT INDEX: USD/CAD RATE FORECAST (AUGUST 17, 2021) (CHART 1)

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

USD/CAD: Retail trader data shows 60.42% 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 6.32% lower than yesterday and 6.87% lower from last week, while the number of traders net-short is 12.93% higher than yesterday and 12.69% 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.

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