Interest Rate Cut Odds Drop For BOC, ECB, And RBA - Central Bank Watch

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 YenSwiss 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)

(Click on image to enlarge)

Interest Rate Cut Odds Drop for BOC, ECB, and RBA - Central Bank Watch

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)

(Click on image to enlarge)

Interest Rate Cut Odds Drop for BOC, ECB, and RBA - Central Bank Watch

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.

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