Central Bank Watch Overview:
- The Federal Reserve delivered its rate cut, and while hinting at a pause in the cut cycle, Fed Chair Powell made clear no rate hikes are coming any time soon.
- Even though the Bank of Japan opted to stay on hold, rates markets are expecting action soon. Meanwhile, the Bank of Canada has seen rate cut odds rise slightly after the October BOC meeting.
- Retail trader positioningsuggests USD/JPY may continue to rally while USD/CAD may continue to fall.
Thanks to more perceived progress on the US-China trade war front and Brexit on the backburner as the UK gears up for another general election, central banks have seen interest rate cut odds shift meaningfully in recent days. Continued rallies by global equity markets alongside weakness among the trio of safe haven currencies – Japanese Yen, Swiss Franc, and US Dollar – and rallies by gold and silver prices suggests that traders expecting more central bank action over the coming months.
Fed Delivers Rate Cut, Closes Off Path to Rate Hike
The Federal Reserve’s October rate decision didn’t fail to generate significant market volatility, thanks in part to another topsy-turvy press conference by Fed Chair Jerome Powell. After delivering a 25-bps rate cut as expected, the FOMC announced a pause in its rate cut cycle – but also said that there was a near-zero chance of a rate hike anytime soon. We’re truly living in the Era of Miscommunication at the Fed.
FEDERAL RESERVE INTEREST RATE EXPECTATIONS (OCTOBER 31, 2019) (TABLE 1)
According to overnight index swaps, market participants are still expecting some more policy action over the next few months, although odds are being pushed back. There is a 70% chance of a hold at the December Fed meeting, up from 60% this time last week. During this time, odds of a 25-bps rate cut in December have shifted from 34% to 32%. But there is still a 51% chance of a 25-bps rate cut at the JanuaryFed meeting, and if not, there is a 60% chance of a cut at the March Fed meeting.
IG Client Sentiment Index: EUR/USD Rate Forecast (OCTOBER 31, 2019) (Chart 1)
EUR/USD: Retail trader data shows 41.46% of traders are net-long with the ratio of traders short to long at 1.41 to 1. The number of traders net-long is 19.24% lower than yesterday and 1.49% lower from last week, while the number of traders net-short is 4.26% higher than yesterday and 4.84% 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.
BOJ Holds Back on Rate Cut – For Now?
The Bank of Japan opted to keep rates on hold this week, bucking what had been a volatile swing in rate cut odds that at one point were pricing in as high as a 70% chance of a 10-bps cut – just last week. The imposition of the new sales tax appears to be a new burden for the Japanese economy, which remains on weak footing. Traders are still anticipating action soon.
Bank of Japan Interest Rate Expectations (OCTOBER 31, 2019) (Table 2)
According to overnight index swaps, there is a 53% chance that the BOJ joins the growing chorus of central banks cutting rates by the end of the year. Rate cut odds remain firm through early-2020, and overnight index swaps are pricing in another 10-bps rate cut by the June 2020 meeting (65%).
IG Client Sentiment Index: USD/JPY Rate Forecast (OCTOBER 31, 2019) (Chart 2)
USD/JPY: Retail trader data shows 49.40% of traders are net-long with the ratio of traders short to long at 1.02 to 1. The number of traders net-long is 7.07% lower than yesterday and 12.22% lower from last week, while the number of traders net-short is 13.02% lower than yesterday and 11.17% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USD/JPY prices may continue to rise. Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed USD/JPY trading bias.
BOC Rate Cut Odds Rise After October Meeting
The Bank of Canada surprised many yesterday with its dour commentary on the state of the global economy, setting back the Canadian Dollar across the board. The US-China trade war’s effects can already be felt, BOC policymakers noted, and that there were evidence suggesting that more difficult may be ahead. But the domestic picture remains strong, and for that, the BOC remains on the sidelines.
Bank of Canada Interest Rate Expectations (OCTOBER 31, 2019) (Table 3)
According to overnight index swaps, the chance of a BOC rate cut this year has risen slightly in the wake of the October BOC meeting. Last week, there was only an 18% chance of a 25-bps rate cut through the end of the year. Now there is a 30% chance of a 25-bps rate cut at the December BOC meeting. Nevertheless, rates markets are expecting a quiet BOC for the foreseeable future: it’s still the case that no rate moves are priced-in through September 2020.
IG Client Sentiment Index: USD/CAD Rate Forecast (OCTOBER 31, 2019) (Chart 3)
USD/CAD: Retail trader data shows 57.55% of traders are net-long with the ratio of traders long to short at 1.36 to 1. The number of traders net-long is 36.86% lower than yesterday and 26.33% lower from last week, while the number of traders net-short is 38.14% higher than yesterday and 5.16% 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.
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— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail at [email protected]
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