COMMODITY PRICES REMAIN ELEVATED

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. With commodity prices remaining elevated, each of Australia, Canada, and New Zealand have seen their terms of trade continue to improve, bolstering the outlook for inflation – as well as the propensity for their central banks to raise interest rates. Indeed, each of the BOC, RBA, and RBNZ have rate hikes on the horizon, per rates markets.

50-BPS HIKE INCOMING FROM BOC

The Canadian economy continues to gain momentum, with the labor market showing strength, inflation expectations remaining elevated, and the growth outlook bolstered by a backdrop of persistently higher commodity prices. The upcoming March Canada employment change and unemployment figures are expected to confirm this recent trend, with the latter figure due in at 5.3% from 5.5%. To prevent inflation expectations from becoming unanchored, the BOC is expected to move aggressively when it meets next week.

BANK OF CANADA INTEREST RATE EXPECTATIONS (APRIL 6, 2022) (TABLE 1)

After the BOC’s 25-bps rate hike last month, rates markets are expecting an accelerated pace of tightening immediately. Rate hike odds for the April meeting have surged higher in recent weeks: one month ago, there was a 162% chance of a 25-bps rate hike (100% chance of a 25-bps rate hike and a 62% chance of a 50-bps rate hike). Now, there is a 198% chance of a 25-bps rate hike (100% chance of a 25-bps rate hike and a 98% chance of a 50-bps rate hike). Currently at 0.50%, the BOC’s main rate is on pace to rise to 1.25% by mid-year.

IG CLIENT SENTIMENT INDEX: USD/CAD RATE FORECAST (APRIL 6, 2022) (CHART 1)

USD/CAD: Retail trader data shows 71.20% of traders are net-long with the ratio of traders long to short at 2.47 to 1. The number of traders net-long is 5.46% lower than yesterday and 11.34% lower from last week, while the number of traders net-short is 3.92% lower than yesterday and 8.49% 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.

RBA WILL HIKE SOON, JUST NOT YET

The Reserve Bank of Australia offered a round of hawkish commentary at its April policy meeting but remains on hold as it waits for the federal elections to take place next month. The Australian economy continues to improve, with the unemployment rate down to 4%, the lowest rate in 13-years – and well-below the RBA’s 2022 year-end forecast. Once Australian federal elections come to pass, the RBA is poised to raise rates quickly.

RESERVE BANK OF AUSTRALIA INTEREST RATE EXPECTATIONS (APRIL 6, 2022) (TABLE 2)

Against this backdrop, no policy action is expected in May. But odds of the first 25-bps rate hike in June have risen materially, up from 68% in early-March to 122% today (100% chance of a 25-bps rate hike and a 22% chance of a 50-bps rate hike). Rate hikes (of either the 25-bps or 50-bps variety) are expected at every meeting thereafter, with the RBA’s main rate set to rise to 2.00% by the end of 2022.

IG CLIENT SENTIMENT INDEX: AUD/USD RATE FORECAST (APRIL 6, 2022) (CHART 2)

AUD/USD: Retail trader data shows 37.65% of traders are net-long with the ratio of traders short to long at 1.66 to 1. The number of traders net-long is 13.07% higher than yesterday and 13.91% higher from last week, while the number of traders net-short is 10.53% lower than yesterday and 8.67% lower 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.

Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current AUD/USD price trend may soon reverse lower despite the fact traders remain net-short.

RBNZ NOT NEARLY DONE

The Reserve Bank of New Zealand’s first two meetings of 2022 each produced a 25-bps rate hike, as expected. But the RBNZ is not close to being finished, even as it has announced a public policy review for its expanded remit (which unlike other major central banks, also includes housing prices as a consideration). The New Zealand unemployment rate, at 3.2%, is holding at multi-decade lows, while inflation remains is at its highest level in 30-years. The RBNZ may make good on expectations that it will raise rates at every meeting in 2022.

RESERVE BANK OF NEW ZEALAND INTEREST RATE EXPECTATIONS (APRIL 6, 2022) (TABLE 3)

There is a 153% chance that the RBNZ raises rates by 25-bps next week (a 100% chance of a 25-bps rate hike and a 53% chance of a 50-bps rate hike) followed by a 366% of a 25-bps rate hike in May (a 100% chance of a 25-bps rate hike, a 100% chance of a 50-bps rate hike, and a 66% chance of a 75-bps rate hike). In other words, the base case scenario is that the RBNZ will double its main rate from 1.00% to 2.00% over the next two meetings.

IG CLIENT SENTIMENT INDEX: NZD/USD RATE FORECAST (APRIL 6, 2022) (CHART 3)

NZD/USD: Retail trader data shows 52.68% of traders are net-long with the ratio of traders long to short at 1.11 to 1. The number of traders net-long is 3.64% lower than yesterday and 16.93% lower from last week, while the number of traders net-short is 7.03% lower than yesterday and 11.19% 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 more net-long than yesterday but less net-long from last week. The combination of current sentiment and recent changes gives us a further mixed NZD/USD trading bias.