Central bank watch: BOC, RBA, & RBNZ interest rate expectations update
Retail trader positioning suggests that AUD/USD rates have a bearish bias, NZD/USD rates have a mixed bias, and USD/CAD rates have a bullish bias.
Rate hike path slowing
In this edition of Central Bank Watch, we’re examining the rates markets around the Bank of Canada, Reserve Bank of Australia, and Reserve Bank of New Zealand. After raising rates aggressively over the course of 2022 – frontloading rate hikes, if you will – the three commodity currency central banks appear poised to slowdown their pace of monetary policy tightening moving forward.
Relative to the Federal Reserve’s still-aggressive intentions, this change in perception has been a negative development for the Australian, Canadian, and New Zealand dollars.
BOC done front-loading
Bank of Canada interest rate expectations (October 13, 2022) (table 1)
According to Canada overnight index swaps (OIS), rates markets are discounting a 24% chance of a 75-bps rate hike later this month (a 100% chance of a 25-bps rate hike, a 100% chance of a 50-bps rate hike, a 24% chance of a 75-bps rate hike), and are favoring a final 25-bps rate hike by the end of the year. Rates markets are estimating the BOC’s main rate to rise to 4.107% by the end of 2022.
IG client sentiment index: USD/CAD rate forecast (October 13, 2022) (chart 1)
USD/CAD: Retail trader data shows 27.87% of traders are net-long with the ratio of traders short to long at 2.59 to 1. The number of traders net-long is 26.61% lower than yesterday and 35.92% lower from last week, while the number of traders net-short is 8.54% lower than yesterday and 8.37% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USD/CAD 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 USD/CAD-bullish contrarian trading bias.
RBA disappointment weighing on Aussie
Recent comments by key Reserve Bank of Australia officials suggests that the central bank still has some ways to go in order to bring its main rate into neutral territory, the level as which monetary policy is neither expansionary nor contractionary. RBA Assistant Governor for Economics Luci Ellis remarks this week effectively pegged the neutral rate between 2.5% and 3.5%; currently, the RBA’s main rate is 2.6%. More tightening may be ahead, but it may come in more measured increments over the next few months.
Reserve Bank of Australia interest rate expectations (october 13, 2022) (table 2)
According to Australia overnight index swaps (OIS), there is an 82% chance of a 25-bps rate hike in November and a 59% chance of a 25-bps rate hike in December. Rates markets are priced such that the RBA will bring its main rate to 2.997% by the end of 2022, which is a meaningful reduction from where markets were priced in early-September, when the main rate was expected to rise to 3.259% by the end of the year.
IG client sentiment index: AUD/USD rate forecast (October 13, 2022) (chart 2)
AUD/USD: Retail trader data shows 80.49% of traders are net-long with the ratio of traders long to short at 4.13 to 1. The number of traders net-long is 7.84% lower than yesterday and 1.35% higher from last week, while the number of traders net-short is 27.51% lower than yesterday and 6.14% lower 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.
Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger AUD/USD-bearish contrarian trading bias.
RBNZ on a steadier path
Unlike the BOC and the RBA, the Reserve Bank of New Zealand is poised to continue its relatively aggressive pace of rate hikes over the near-term time horizon (although still not as aggressive as the Fed). In recent weeks, RBNZ Deputy Governor Christian Hawkesby said that policymakers want to bring the main rate “comfortably above neutral” in order to help reduce inflation pressures (which stood at +7.3% y/y as of 2Q’22; 3Q’22 New Zealand inflation data is due out before the end of the month).
Reserve Bank of New Zealand interest rate expectations (October 13, 2022) (table 3)
According to New Zealand overnight index swaps, there is a 20% chance that the RBNZ raises rates by 75-bps when they meet in November (a 100% chance of a 25-bps rate hike and a 100% chance of a 50-bps rate hike). Markets are now pricing the overnight cash rate (OCR) to rise to 4.051% by the end of this year, up from an expected 3.927% by the end of 2022 as discounted last month.
IG client sentiment index: NZD/USD rate forecast (October 13, 2022) (chart 3)
NZD/USD: Retail trader data shows 73.05% of traders are net-long with the ratio of traders long to short at 2.71 to 1. The number of traders net-long is 8.64% lower than yesterday and 11.35% lower from last week, while the number of traders net-short is 22.93% lower than yesterday and 9.02% lower 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.
Positioning is more net-long than yesterday but less net-long from last week. The combination of current sentiment and recent changes gives us a further mixed NZD/USD trading bias.
This information has been prepared by DailyFX, the partner site of IG offering leading forex news and analysis. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
This information has been prepared by IG, a trading name of IG Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
CFDs are a leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.
Start trading forex today
Find opportunity on the world’s most-traded – and most-volatile – financial market
- Trade spreads from just 0.6 points on EUR/USD
- Analyse with clear, fast charts
- Speculate wherever you are with our intuitive mobile apps
See an FX opportunity?
Try a risk-free trade in your demo account, and see whether you’re onto something.
- Log in to your demo
- Try a risk-free trade
- See whether your hunch pays off
See an FX opportunity?
Don’t miss your chance – upgrade to a live account to take advantage.
- Get spreads from just 0.6 points on popular pairs
- Analyse and deal seamlessly on fast, intuitive charts
- See and react to breaking news in-platform
See an FX opportunity?
Don’t miss your chance. Log in to take your position.
Live prices on most popular markets
- Forex
- Shares
- Indices
Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.