Central Bank Watch Overview:
- The Reserve Bank of New Zealand is favored to cut its main interest rate next week, although traders are anticipating a long pause between policy shifts thereafter.
- Neither the Bank of Canada nor the Reserve Bank of Australia are due to change interest rates over the next six months, allowing the Australian and Canadian Dollars some breathing room.
- Retail trader positioning suggests AUD/USD may continue to rally, while NZD/USD and USD/CAD are on less certain footing.
Looking for longer-term forecasts on the Australian, Canadian, or New Zealand Dollars? Check out the DailyFX Trading Guides.
Everything is awesome – at least, that’s what bond markets and US equities are signaling to market participants. With US stock markets at all-time highs and US Treasury yields rising rapidly in recent weeks, there is a sense of calm settling over the market (see: falling volatility readings) thanks to news headlines that the US-China trade war may be winding down. As long as the global economy is on the path to avoiding a significant slowdown – a resolution between the world’s two largest economies is a step in that direction – G10 currencies’ central banks’ “race to the bottom” may be slowing down.
RBNZ Rate Cut in Sight, Then a Long Pause
The New Zealand Dollar has been one of the worst performing currencies in 2019, but over the past few weeks, has been able to recover meaningfully around US-China trade war headlines. Reduced speculation around global growth concerns have helped lift expectations for commodity-sensitive economies and industries. As a result, while the RBNZ is still likely to move ahead with its rate cut over the coming week, it seems that it is the last rate cut for the foreseeable future.
Reserve Bank of New Zealand RATE EXPECTATIONS (NOVEMBER 7, 2019) (TABLE 1)
According to New Zealand overnight index swaps, market participants are discounting a 71% chance of a 25-bps rate cut at the November RBNZ meeting, up from 57% this time last week. In the past two months, rate cut odds for November have shifted wildly, although a rate cut has always been favored: on September 8, there was a 61% chance of a 25-bps rate cut; on October 8, there was an 88%. However, once the November RBNZ meeting passes, rates markets aren’t pricing in another policy shift through at least September 2020.
IG Client Sentiment Index: NZD/USD Rate Forecast (NOVEMBER 7, 2019) (Chart 1)
NZD/USD: Retail trader data shows 64.40% of traders are net-long with the ratio of traders long to short at 1.81 to 1. The number of traders net-long is 3.33% higher than yesterday and 23.34% higher from last week, while the number of traders net-short is 6.55% lower than yesterday and 12.23% higher 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. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger NZD/USD-bearish contrarian trading bias.
Australian Dollar Rallies as RBA Rate Cut Odds Plunge
Australia’s two largest trading partners have furthers taken steps to de-escalate the US-China trade war, and concerns that global growth is about to head sharply lower are no longer weighing on the commodity-sensitive currency. After the Reserve Bank of Australia’s 25-bps rate cut at the October meeting, rates markets foresee a much quieter policy environment over the coming months.
Reserve Bank of Australia Rate Expectations (NOVEMBER 7, 2019) (Table 2)
According to Australia cash rate futures, there is an 87% chance that the RBA keeps its main rate on hold at 0.75% through the end of the year. One week ago, there was a 74% chance of no move at the December RBA meeting; one month ago, on October 8, a 25-bps rate cut was favored (50% to 33% for no change in rates). Rate cut odds are much more relaxed through early-2020, with overnight index swaps pricing in the next 25-bps rate cut by the May 2020 meeting (51%).
IG Client Sentiment Index: AUD/USD Rate Forecast (NOVEMBER 7, 2019) (Chart 2)
AUD/USD: Retail trader data shows 49.15% of traders are net-long with the ratio of traders short to long at 1.03 to 1. The number of traders net-long is 0.67% lower than yesterday and 10.28% higher from last week, while the number of traders net-short is 1.80% higher than yesterday and 20.47% higher 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. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger AUD/USD-bullish contrarian trading bias.
BOC Rate Cut Odds Pullback Sharply
The Bank of Canada surprised market participants last week with its dour commentary on the state of the global economy, setting back the Canadian Dollar across the board. Yet it was noted that, because the domestic picture remains strong, the BOC remains on the sidelines. Even though BOC policymakers noted that the US-China trade war’s effects can already be felt, recent headlines pertaining to the US-China trade war give greater credence to the idea that the BOC is simply jawboning policy rather than queueing expectations for a rate move in the near-future.
Bank of Canada Interest Rate Expectations (NOVEMBER 7, 2019) (Table 3)
According to Canada overnight index swaps, the chance of a BOC rate cut over the coming months has dropped meaningfully since the October BOC meeting. Last week, there was a 33% chance of a 25-bps rate cut through the end of the year; now, markets are only pricing a 15% chance. Rates markets are expecting a quiet BOC for the foreseeable future: it’s still the case that no rate moves are priced-in until at least September 2020 (55%).
IG Client Sentiment Index: USD/CAD Rate Forecast (NOVEMBER 7, 2019) (Chart 3)
USD/CAD: Retail trader data shows 54.88% of traders are net-long with the ratio of traders long to short at 1.22 to 1. The number of traders net-long is 7.48% lower than yesterday and 4.63% lower from last week, while the number of traders net-short is 1.39% lower than yesterday and 8.54% 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.
FX TRADING RESOURCES
Whether you are a new or experienced trader, DailyFX has multiple resources available to help you: an indicator for monitoring trader sentiment; quarterly trading forecasts; analytical and educational webinars held daily; trading guides to help you improve trading performance, and even one for those who are new to FX trading.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail at [email protected]
Follow him on Twitter at @CVecchioFX
View our long-term forecasts with the DailyFX Trading Guides