Central Bank Watch: BOC, RBA, & RBNZ Interest Rate Expectations Update

Now into the second month of this year, central bank action is heating up again. Earlier on Thursday, the Bank of England's"Super Thursday" made a strong reaction in the British Pound, thanks in part to some key consideration: they wouldn't proceed to negative interest rates, even when they suggested banks accept preparations for such an occasion.

Central Bank Watch: BOC, RBA, & RBNZ Interest Rate Expectations Update

The last of this trio has openly flirted with the idea, but all three central banks are now set to keep rates around, but not below, zero. Now, not one of those central banks tied to the commodity currencies (AUD, CAD, NZD) have seen either rate cut or increase odds movement indefinitely.

BANK OF CANADA COMPLAINS ABOUT CAD
While the Bank of Canada stood tap in its very first meeting of this year, Governor Tiff Macklem didn't mince words over the issue that an enjoying Loonie is posing for the Canadian market. "In this situation where we have seen this broad-based US buck deprecation that doesn't signify some positive growth in Canada that the exchange rate is absorbing...the market rate is beginning to make a substance headwind for the Canadian market." What's more, it was noted that the recent Canadian Dollar appreciation"is weighing on our exports and it's also making it harder for our domestic producers to compete against firms in other countries."

Unfortunately for the BOC, there's not much that can be done to avoid the Canadian Dollar appreciation vis-à-vis USD/CAD, at least, as Governor Macklem concedes, when"at a circumstance where our Canada-U.S. exchange rate is moving largely due to made-in-U.S. developments as opposed to made-in-Canada developments."

BANK OF CANADA INTEREST RATE EXPECTATIONS (FEBRUARY 4, 2021) (TABLE 1)

Recently, however, rate hike expectations have started to creep higher. In mid-January, there was a 7 percent chance of a 25-bps rate cut from the BOC by December 2021. Currently, Canada overnight index swaps (OIS) are prices at a 16% chance of a 25-bps rate increase through the end of the year. While a rate increase appears to be highly unlikely, these pricing metrics indicates the chance of adverse interest rates is nill.

USD/CAD: Retail trader data shows 69.76% of dealers are net-long using the proportion of traders long to brief at 2.31 to 1. The number of traders net-long is 1.02percent lower than yesterday and 45.58% higher from last week, even while the number of traders net-short is 0.53% greater than yesterday and 23.17% reduced from previous week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USD/CAD prices will continue to drop.

Positioning is not as net-long than yesterday however more net-long from a week. The combination of present sentiment and current changes gives us an additional combined USD/CAD trading bias.

RESERVE BANK OF AUSTRALIA'S HANDS TIED
The RBA's very first meeting of 2021 earlier this week came and went with no surprise. The prognosis from the end of 2020 remains valid:"Even after changing the attention of policy setting in the November RBA meeting, where officials outside a greater focus on actual labor market outcomes (e.g. the unemployment rate) over expected cost pressures, the December RBA meeting generated a general consensus that, yes, the situation was still'greater than expected,' at Governor Phillip Lowe's words."

"The RBA is effectively admitting they're keeping interest rates at which they are because...everyone else is doing it as well. Beyond this, the information just does not support the efforts, and rates markets do not anticipate any shifts in policy henceforth. Based on Australia overnight index swaps, there is really between a 16% to 25% chance of a rate cut through December 2021, which is apparently only a pricing quirk due to the RBA's remarkable efforts to institute yield curve control. The RBA will be maintaining its overnight cash rate at 0.1percent or lower for the next two and a half years."

AUD/USD: Retail trader data shows 42.10% of dealers are net-long using the proportion of traders short to long at 1.38 to 1. The number of dealers net-long is 5.00% lower than yesterday and 7.74% reduced from a week, even while the number of dealers net-short is 3.31percent lower compared to yesterday and 33.12% higher from last week.

We typically have a contrarian view to audience sentiment, and also the fact traders are net-short suggests AUD/USD prices will continue to grow.

Dealers are further net-short than yesterday and a week, and the combination of present sentiment and current fluctuations gives us a stronger AUD/USD-bullish contrarian trading bias.

The RBNZ the sole of the three commodity money central banks to not yet meet or create any commentary thus far in 2021. Our end of year monitoring regarding the RBNZ's push to adverse interest rates stays valid -- they are not happening. "RBNZ Governor Adrian Orr has had to rebuff a government request to include housing costs in the proper policy setting process, which while seemingly benign, suggests that the economy is undergoing a price bubble and thus would not be open to even lower (e.g. negative) interest rates."

Therefore, New Zealand overnight index swaps (OIS) are ignoring a 6 percent chance of a rate cut by earnings, and a 19% chance overall that interest rates may dip to 0 percent from the previous policy meeting of the year. The most likely situation is that that the primary rate will remain at its current level into at least February 2022, and the RBNZ should affirm as much when it meets next last this month on February 24.

NZD/USD: Retail trader data shows 32.00percent of traders are net-long with the ratio of traders short to long at 2.12 to 1. The amount of traders net-long is 9.77percent lower than yesterday and 24.05% lower from last week, whereas the amount of dealers net-short is 11.61% lower than yesterday and 17.51percent higher from last week.

We typically have a contrarian view to crowd sentiment, and the truth that traders are net-short indicates NZD/USD prices will continue to rise.

Positioning is not as net-short than yesterday however more net-short from a week. The combination of current sentiment and recent modifications gives us an additional mixed NZD/USD trading bias.

Date Of Update: 04 February 2021, 21:24

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