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

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CENTRAL BANK WATCH OVERVIEW:

• Both the Bank of Canada and Reserve Bank of New Zealand are expected to hike rates at their next meeting.
• Meanwhile, the Reserve Bank of Australia may wait to raise rates until mid-year, after Australian federal elections take place.
• Retail trader positioning suggests that the Australian Dollar and Canadian Dollar have bullish biases while the New Zealand Dollar is on neutral ground.

INFLATION IN FOCUS, NOT OMICRON

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. While the COVID-19 omicron variant remains a concern, it has become less of a public health issue and more of a supply chain problem, exacerbating some of the highest inflation readings in decades. With labor markets around the world proving resilient, each of the three major central banks covered in this report are expected to hike interest rates relatively soon.

For more information on central banks, please visit the DailyFX Central Bank Release Calendar.

BOC OVERLOOKING WEAKER DATA

The COVID-19 omicron variant may have led to weakness in the January Canada employment change report and a sharp rise in the unemployment rate, but that doesn’t mean that the Bank of Canada will be backing away from its hawkish stance anytime soon. In fact, BOC policymakers continue to downplay the impact of omicron on the path of interest rates; if anything, omicron has prolonged supply chain issues that are pushing inflation rates higher. And with oil prices continuing to surge, the Canadian economy is expected to regain its footing rather quickly.

BANK OF CANADA INTEREST RATE EXPECTATIONS (FEBRUARY 8, 2022) (TABLE 1)

One month ago, there was a 102% chance of a 25-bps rate hike in March (100% chance of a 25-bps rate hike plus a 2% chance of a 50-bps rate hike). Now, in spite of the weaker January Canadian labor market data, the odds of a 25-bps rate hike in March are 112% (100% chance of a 25-bps rate hike plus a 12% chance of a 50-bps rate hike). The next 25-bps hike is most likely to arrive in April (100% chance of a 25-bps rate hike and a 23% chance of a 50-bps rate hike).

IG CLIENT SENTIMENT INDEX: USD/CAD RATE FORECAST (FEBRUARY 8, 2022) (CHART 1)

USD/CAD: Retail trader data shows 67.08% of traders are net-long with the ratio of traders long to short at 2.04 to 1. The number of traders net-long is 9.59% higher than yesterday and 17.45% higher from last week, while the number of traders net-short is 5.11% higher than yesterday and 13.55% lower 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.

Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USD/CAD-bearish contrarian trading bias.

RBA TO HIKE RATES MID-YEAR

The Reserve Bank of Australia is increasingly likely to raise interest rates in the first half of the year after several months of better than expected economic data. The current Australian unemployment rate is 4.2%, already-matching the RBA’s 2022 year-end forecast. But there is a potential hurdle that is delaying action by the RBA sooner: Australian federal elections have to be held by May at the latest. Once the elections pass, the RBA will be freer to act.

RESERVE BANK OF AUSTRALIA INTEREST RATE EXPECTATIONS (FEBRUARY 8, 2022) (TABLE 2)

RBA rate hike odds for 2022 have continued to rise in recent weeks, with five rate hikes now due before the year is over – this is up from three 25-bps rate hikes discounted one month ago. The timing of the rate hikes has been compressed in the second half of the year, in part due to the aforementioned Australian federal elections. The first 25-bps rate hike is expected to arrive in June (78% chance), with a second hike in August (94% chance), a third hike in September (57% chance), a fourth hike in November (93% chance), and the fifth and final hike in December (74% chance).

IG CLIENT SENTIMENT INDEX: AUD/USD RATE FORECAST (FEBRUARY 8, 2022) (CHART 2)

AUD/USD: Retail trader data shows 55.93% of traders are net-long with the ratio of traders long to short at 1.27 to 1. The number of traders net-long is 5.84% lower than yesterday and 5.27% lower from last week, while the number of traders net-short is 18.26% higher than yesterday and 29.54% higher 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.

Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current AUD/USD price trend may soon reverse higher despite the fact traders remain net-long.

 

RBNZ RETAINS AGGRESSIVE EXPECTATIONS

The Reserve Bank of New Zealand has yet to meet in 2022, but will do so in two weeks and bring forth its first 25-bps rate hike of the year. The New Zealand unemployment rate is the lowest since 1985, and inflation is persisting at its highest level in 30-years. House prices increased by +27.6% in 2021, an important consideration given that housing is part of the RBNZ’s remit.

RESERVE BANK OF NEW ZEALAND INTEREST RATE EXPECTATIONS (FEBRUARY 8, 2022) (TABLE 3)

There is a 129% chance of the RBNZ raising rates later this month (a 100% chance of a 25-bps rate hike and a 29% chance of a 50-bps rate hike). The next hike is expected to arrive at the following meeting in April, and then again in May. Overall, the RBNZ is expected to raise rates at six of its seven meetings in 2022. It remains the case that rates markets are discounting the quickest pace of rate hikes by any major central bank in the post-Global Financial Crisis era.

IG CLIENT SENTIMENT INDEX: NZD/USD RATE FORECAST (FEBRUARY 8, 2022) (CHART 3)

NZD/USD: Retail trader data shows 62.50% of traders are net-long with the ratio of traders long to short at 1.67 to 1. The number of traders net-long is 3.70% higher than yesterday and 7.69% lower from last week, while the number of traders net-short is 1.20% higher than yesterday and 42.37% 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.

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.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

DISCLOSURES

Christopher Vecchio, CFA, Senior Strategist