With a Brexit deal in focus and the US-China trade war de-escalating G10 currencies’ central banks’ rate cut odds are shifting. Further gains by global equity markets alongside selloffs by the trio of safe haven currencies (Japanese Yen, Swiss Franc, and US Dollar) indicate that risk appetite has improved materially alongside falling rate cut odds. While the RBA looks like it still may cut rates again in 2019, rates markets are no longer discounting rate cuts from the ECB this year, and the BOC is expected to stay on hold until September 2020.

No ECB Rate Cut Until June 2020

Alongside progress on both the Brexit and the US-China trade war fronts, G10 currencies’ central banks interest rate cut odds have dropped in recent days. To no surprise, the European Central Bank has seen rate cut odds ease further.

EUROPEAN CENTRAL BANK INTEREST RATE EXPECTATIONS (OCTOBER 3, 2019) (TABLE 1)

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According to overnight index swaps, market participants are currently discounting a 71% chance of no policy change at the October ECB meeting, down from 83% this time last week. But this is due to rising odds of a 10-bps rate hike, from 20% to 29% over the same timeframe. Nevertheless, having just previously cut interest rates last month, it seems highly unlikely that the ECB would reverse course in such quick order.

IG Client Sentiment Index: EUR/USD Rate Forecast (OCTOBER 18, 2019) (Chart 1)

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EUR/USD: Retail trader data shows 40.6% of traders are net-long with the ratio of traders short to long at 1.46 to 1. The percentage of traders net-long is now its lowest since Jun 10 when EUR/USD traded near 1.13141. The number of traders net-long is 7.2% lower than yesterday and 21.4% lower from last week, while the number of traders net-short is 10.5% higher than yesterday and 11.1% higher from last week.

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

BOC Rates to Stay on Hold Until September 2020

The Canadian economy continues to show signs of resiliency in the face of an uncertain global growth environment, with USD/CAD quickly approaching its yearly lows even though its commodity currency brethren have recently hit yearly lows versus the US Dollar. Stability in oil prices could with a relaxation in tensions between the US and China are catering to a reduction in Bank of Canada rate cut expectations.

Bank of Canada Interest Rate Expectations (OCTOBER 18, 2019) (Table 2)

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According to overnight index swaps, the odds of a BOC rate cut this year are continuing to dwindle. Last week there was a 6% chance of a 25-bps rate cut at the October BOC meeting; now, there is only a 4% chance. Rates markets are expecting a quiet BOC over the coming months: the first month that sees rate expectations in excess of 50% is September 2020 (56%).

IG Client Sentiment Index: USD/CAD Rate Forecast (OCTOBER 18, 2019) (Chart 2)

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USD/CAD: Retail trader data shows 57.4% of traders are net-long with the ratio of traders long to short at 1.35 to 1. The number of traders net-long is 42.5% higher than yesterday and 91.5% higher from last week, while the number of traders net-short is 9.1% lower than yesterday and 1.1% 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.

Odds of Another RBA Rate Cut in 2019 are Fading

More signs that the US-China trade war is de-escalating has been a welcomed development for the Australian economy, whose two largest trading partners are engaged in a stalemate. As a result, the Reserve Bank of Australia has seen market participants reduce their rate cut expectations in recent weeks. Rates markets are now pricing in no more than a coin flip’s chance of a rate move by the end of the year.

Reserve Bank of Australia Interest Rate Expectations (OCTOBER 18, 2019) (Table 3)

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Odds of a 25-bps rate cut at the November RBA meeting have dropped further over the past two weeks, from 47% on October 4 to 18% today. There is only a 50% chance of a rate cut at the December meeting. If not, then markets are pricing in a 63% chance of a 25-bps interest rate cut at the first meeting of 2020. The rate cut cycle appears to be coming to an end: there are no other rate cuts discounted for the rest of next year.

IG Client Sentiment Index: AUD/USD Rate Forecast (OCTOBER 18, 2019) (Chart 3)

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AUD/USD: Retail trader data shows 58.7% of traders are net-long with the ratio of traders long to short at 1.42 to 1. In fact, traders have remained net-long since Jul 19 when AUD/USD traded near 0.69772; price has moved 1.9% lower since then. The percentage of traders net-long is now its lowest since Sep 16 when AUD/USD traded near 0.6868. The number of traders net-long is 3.3% higher than yesterday and 6.1% lower from last week, while the number of traders net-short is 10.5% higher than yesterday and 29.8% higher 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. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current AUD/USD price trend may soon reverse higher despite the fact traders remain net-long.