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Central banks recap with Daniel Lacalle


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IGTV’s Daniela Sabin Hathorn is joined by economist, Daniel Lacalle, as they look back at some of the key takeaways from this week’s busy central bank schedule.

He goes over the market reactions from the Federal Reserve and Bank of England’s 75bps and 25bps hikes, as well as the distinctions in policy response from the European Central Bank, the Bank of Japan, and the Swiss National Bank.

 

 

 

 

 

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Yen continues to underperform following BoJ minutes

Bank of Japan (BoJ) preview: what to expect | IG South Africa

With little or no let-up on the stimulus provided by the Bank of Japan (BoJ) the yen has continued to buckle under the pressure of the more valuable US dollar. The BoJ warned of the economic harm done by yen weakness.

IGTV’s Jeremy Naylor looks at the USD/JPY trade over the ¥136 level.

 

 

 

 

 

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

Bank of New Zealand

CENTRAL BANK WATCH OVERVIEW:

  • Each of the commodity currency central banks are expected to hike rates by at least 50-bps at their next meetings.
  • Matching the pace of the Federal Reserve, the Bank of Canada is anticipated to hike by 75-bps in July.
  • Retail trader positioning suggests that AUD/USD rates have a bearish bias, NZD/USD rates have a neutral bias, and USD/CAD rates have a bullish bias.

SAGGING COMMODITY PRICES DON’T MATTER MUCH

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. Despite a slump in commodity prices in recent weeks – from copper, to oil, to wheat – multi-decade highs in inflation rates continue to provoke speculation that major central banks will continue to raise rates rapidly in the coming months. Each of the Bank of Canada, the Reserve Bank of Australia, and the Reserve Bank of New Zealand are expected to hike their main rates by at least 50-bps in July.

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

75-BPS HIKE INCOMING?

Price pressures continue to rise in Canada, despite strong action by the Bank of Canada in recent weeks to tamp down a rapid rise in the cost of living. The BOC’s June policy statement included the phrase “the Governing Council is prepared to act more forcefully if needed to meet its commitment to achieve the 2% inflation target,” and rates markets believemore aggressive tightening is on the horizon when policymakers meet in mid-July.

BANK OF CANADA INTEREST RATE EXPECTATIONS (JUNE 21, 2022) (TABLE 1)

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

After the BOC’s 50-bps rate earlier this month, rates markets are expecting an accelerated pace of tightening immediately. Rate hike odds for the July meeting have surged higher in recent weeks: there is a 281% chance of a 25-bps rate hike (100% chance of a 25-bps rate hike, a 100% chance of a 50-bps rate hike, and an 81% chance of a 50-bps rate hike). Currently at 1.50%, the BOC’s main rate is on pace to rise to 2.25% next month.

IG CLIENT SENTIMENT INDEX: USD/CAD RATE FORECAST (JUNE 21, 2022) (CHART 1)

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

USD/CAD: Retail trader data shows 31.52% of traders are net-long with the ratio of traders short to long at 2.17 to 1. The number of traders net-long is 11.08% lower than yesterday and 32.32% lower from last week, while the number of traders net-short is 8.09% higher than yesterday and 64.83% higher 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 MINUTES: EXPECT MORE HIKES

The June RBA meeting minutes strongly hinted at an aggressive pace of rate hikes moving forward, after the RBA levied a surprise 25-bps rate hike in May and a 50-bps rate hike earlier this month. RBA Governor Philip Lowe recently said that another 50-bps rate hike should be expected in July, as the Australian economy continues to see an incredibly strong labor market with minimal concerns about a recession materializing in the coming months.

RESERVE BANK OF AUSTRALIA INTEREST RATE EXPECTATIONS (JUNE 21, 2022) (TABLE 2)

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

According to Australia overnight index swaps (OIS), there is a 175% chance of a 25-bps rate hike in July (100% chance of a 25-bps rate hike and a 75% chance of a 50-bps rate hike). But the aggressive shift in RBA rate hike odds is best reflected when looking to the end of 2022: in April, the RBA’s main rate set was expected to rise to 2.00% by the end of the year; the terminal rate is now discounted at 3.566%.

IG CLIENT SENTIMENT INDEX: AUD/USD RATE FORECAST (JUNE 21, 2022) (CHART 2)

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

AUD/USD: Retail trader data shows 70.15% of traders are net-long with the ratio of traders long to short at 2.35 to 1. The number of traders net-long is 7.55% higher than yesterday and 7.89% higher from last week, while the number of traders net-short is 4.75% lower than yesterday and 11.15% 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 STILL NOT DONE

The Reserve Bank of New Zealand has been on a rate hike war path through the first six months of 2022, and more aggressive tightening is expected moving forward – even as economic data continues to deteriorate. A reminder, the RBNZ monetary policy remit is not just about inflation, but about house prices too. Not only is the RBNZ expected to raise rates at every meeting through February 2023, but the pace of rate hikes is expected to accelerate moving forward.

RESERVE BANK OF NEW ZEALAND INTEREST RATE EXPECTATIONS (JUNE 21, 2022) (TABLE 3)

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

There is a 213% chance that the RBNZ raises rates by 25-bps next month (a 100% chance of a 25-bps rate hike, a 100% chance of a 50-bps rate hike, and an 18% chance of a 75-bps rate hike) followed by a 270% of a 25-bps rate hike in August (a 100% chance of a 25-bps rate hike, a 100% chance of a 50-bps rate hike, and a 70% chance of a 75-bps rate hike). Current pricing suggests that the RBNZ’s main rate will rise from 2.00% to 3.25% before the calendar hits September.

IG CLIENT SENTIMENT INDEX: NZD/USD RATE FORECAST (JUNE 21, 2022) (CHART 3)

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

NZD/USD: Retail trader data shows 69.81% of traders are net-long with the ratio of traders long to short at 2.31 to 1. The number of traders net-long is unchanged than yesterday and 16.84% higher from last week, while the number of traders net-short is 7.46% higher than yesterday and 23.81% 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 less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed NZD/USD trading bias.

 

--- Written by Christopher Vecchio, CFA, Senior Strategist. 22nd June 2022 | DailyFX

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Central Bank Watch: BOE & ECB Interest Rate Expectations Update

Central Bank Watch: BOE & ECB Interest Rate Expectations Update

CENTRAL BANK WATCH OVERVIEW:

  • Bank of England rate hike odds keep rising: the 2022 terminal rate is up to 2.827%, from 2.099% in mid-May.
  • The European Central Bank is expected to raise rates by 150-bps through 2022.
  • Retail trader positioning suggests both EUR/USD and GBP/USD rates have a mixed bias.

EVEN MORE RATE HIKES

In this edition of Central Bank Watch, we’ll cover the two major central banks in Europe: the Bank of England and the European Central Bank. While both the Eurozone and the UK are struggling with diminishing growth rates, policymakers remain squarely focused on taming multi-decade highs in inflation rates. Rate hike odds have jumped significantly for both the BOE and the ECB, with at least 150-bps worth of hikes discounted through the end of 2022.

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

BOE HIKE ODDS KEEP CLIMBING

The British Pound has proved resilient in recent weeks, no doubt fueled by the continued climb in BOE rate hike odds. UK inflation rates continue to edge higher, and with few signs that the rises in food and energy prices will halt anytime soon, rates markets are now their most aggressive they’ve been all year in terms of BOE hike odds.

BANK OF ENGLAND INTEREST RATE EXPECTATIONS (JUNE 23, 2022) (TABLE 1)

Central Bank Watch: BOE & ECB Interest Rate Expectations Update

UK overnight index swaps (OIS) are discounting a 199% chance of a 25-bps rate hike in August (a 100% chance of a 25-bps hike and a 99% chance of a 50-bps hike). Rates markets are pricing another 50-bps rate hike in September, and again in November. The expected terminal rate for the BOE in 2022 now sits at 2.827%, up from 2.099% in mid-May.

IG CLIENT SENTIMENT INDEX: GBP/USD RATE FORECAST (JUNE 23, 2022) (CHART 1)

Central Bank Watch: BOE & ECB Interest Rate Expectations Update

GBP/USD: Retail trader data shows 72.71% of traders are net-long with the ratio of traders long to short at 2.66 to 1. The number of traders net-long is 3.97% higher than yesterday and 4.83% lower from last week, while the number of traders net-short is 0.70% higher than yesterday and 15.62% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBP/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 GBP/USD trading bias.

TAMING INFLATION, PREVENT FRAGMENTATION

Less than a week after the June European Central Bank policy meeting, the Governing Council reconvened in order to calm down Eurozone sovereign bond markets. Peripheral bond yields, particularly those in Greece and Italy, began to widen out rapidly versus their core (e.g. German) counterparts, rekindling fears of a revitalized Eurozone debt crisis. Yet since the ECB’s cryptic and vague remarks about preventing fragmentation in bond markets, Greek and Italian bond yields have calmed down in enough manner to keep fears at bay.

EUROPEAN CENTRAL BANK INTEREST RATE EXPECTATIONS (JUNE 23, 2022) (TABLE 2)

Central Bank Watch: BOE & ECB Interest Rate Expectations Update

Eurozone OIS are now discounting a 30-bps rate hike in July (295% chance of a 10-bps rate hike), in line with what most ECB policymakers have been suggesting in recent weeks. €STR, which replaced EONIA, is now priced for 156-bps more hikes through the end of 2022, up from 60-bps at the end of April. The expectations gap between the ECB and other major central banks continues to close, which should help insulate the Euro from more significant downside (so long as the rate hike pricing remains elevated).

IG CLIENT SENTIMENT INDEX: EUR/USD RATE FORECAST (JUNE 23, 2022) (CHART 2)

Central Bank Watch: BOE & ECB Interest Rate Expectations Update

EUR/USD: Retail trader data shows 66.09% of traders are net-long with the ratio of traders long to short at 1.95 to 1. The number of traders net-long is 3.63% lower than yesterday and 11.98% lower from last week, while the number of traders net-short is 4.05% lower than yesterday and 19.48% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EUR/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 EUR/USD trading bias.

 

 

Jun 23, 2022 | DailyFX
Christopher Vecchio, CFA, Senior Strategist

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