Overview of central bank supervision:

• The December RBA meeting gave the Aussie a boost, while the December BOC meeting – and its more cautious tone, thanks to the omicron variant – turned out to be a disappointment for the Canadian dollar.
• AThe three central banks covered by this report should hike their main rates in the first half of 2022.
• Retail trader positioning suggests the near-term outlook is mostly bullish for the trio of major commodity-linked currencies.

Is the Omicron variant of concern?

In this edition of Central Bank Watch, we take a look at the rate markets around the Bank of Canada, Reserve Bank of Australia, and Reserve Bank of New Zealand. There are some concerns about the emergence of the omicron variant, but clearly not enough for rate markets to diminish the possibility that the three central banks covered in this report will raise their primary rates in the first half of 2022.

For more information on central banks, please see the DailyFX central bank release schedule.

BOC affirms forward-looking orientations

The Bank of Canada surprised few people at its December policy meeting, suggesting that forward guidance remains in place, pointing to a tightening in early 2022. However, despite overheating inflation numbers and a market in the Surprisingly resilient Canadian work, the central bank has consistently expressed reservations about ending low rates given the emergence of the omicron variant and flooding in British Columbia, which threatens to create more disruption in the supply chain. supply. From this strategist’s perspective, omicron won’t cause much trouble, and the strength of the Canadian economy will set the BOC in place to raise rates in 1Q’22.

Bank of Canada interest rate forecast (December 8, 2021) (Table 1)

Following the BOC’s December rate decision, markets retreated from their more aggressive expectations of how quickly the BOC will tighten policy in 2022. In mid-November, index swaps in the Canada day-to-day forecast a 100% chance of a 25 basis point rate hike. in March 2022 with a 31% probability of a 50bp rate hike; After the December BOC meeting, the rate markets still account for a 100% probability of a 25bp rate hike in March, but with a reduced 13% probability of a 50bp hike.

IG Client Sentiment Index: USD / CAD rate forecast (December 8, 2021) (Chart 1)

USD / CAD: Retail trader data shows 59.77% of traders are net long with a ratio of long / short traders at 1.49 to 1. The number of net long traders is 14.63% higher than ‘yesterday and 9.23% higher than last week, while the number of net-short traders is 11.90% lower than yesterday and 14.05% lower than last week.

We generally take a contrarian view of crowd sentiment, and the fact that traders are net long suggests that USD / CAD prices may continue to decline.

Traders are even longer than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USD / CAD countercurrent trading bias.

RBA continues to preach patience

The RBA has preached “patience” with its policy normalization approach, abandoning its efforts to control the yield curve while continuing its asset-buying pace of AU $ 4 billion per week. No change in the prime rate was achieved by the RBA which abandoned its pledge to keep rates on hold until 2024, effectively allowing rate markets to start anticipating rate hikes in 2022. In turn, that may mean that there is virtually a guarantee that the RBA will cease asset purchases at its first policy meeting next year in February.

AUSTRALIAN RESERVE BANK INTEREST RATE EXPECTATIONS (December 8, 2021) (TABLE 2)

As the Australian economy began to emerge from lockdowns and the RBA signaled that the stimulus was about to end soon, rate markets slowly started to become more aggressive regarding the timing of the RBA’s first rate hike. . In our previous update, overnight index swaps in Australia discounted July 2022 as the most likely period for the first rate hike (68% chance). After the last RBA meeting of this year, rate markets now see June 2022 as the most likely time for the first hike (55% chance).

IG Client Sentiment Index: AUD / USD rate forecast (DECEMBER 8, 2021) (Graph 2)

AUD / USD: Retail traders data shows 68.97% of traders are net long with a ratio of long / short traders at 2.22 to 1. The number of net long traders is 1.26% higher than that of yesterday and 2.35% higher than that of last week. while the number of net-short traders is 6.34% lower than yesterday and 9.20% higher than last week.

We generally take a contrarian view of crowd sentiment, and the fact that traders are net long suggests that AUD / USD prices may continue to fall.

The positioning is more net-long than yesterday but less net-long than last week. The combination of current sentiment and recent changes gives us another AUD / USD blended trading bias.

RBNZ still weighs on the kiwi

Before the Reserve Bank of New Zealand’s November rate decision, markets were almost anticipating a 50 basis point rate hike. Of course, the RBNZ only registered a 25 basis point hike at the November meeting, which turned out to be a disappointment for the New Zealand dollar. But the RBNZ continues to offer hawkish forward indications, suggesting that a series of interest rate hikes looms on the horizon once policymakers meet in early 2022.

NEW ZEALAND RESERVE BANK INTEREST RATE EXPECTATIONS (DECEMBER 8, 2021) (Table 3)

Rate markets are currently discounting a 100% chance of a 25 basis point rate hike at the February 2022 RBNZ meeting, with a 30% chance of a 50 basis point hike. While rates only rise 25 basis points in February 2022, the rate markets anticipate an immediate hike in April. Our view remains that “the pricing of the RBNZ rate hike may be an albatross around the Kiwi’s neck for the foreseeable future” given how aggressive rate markets are already valued; the market is currently forecasting the most aggressive rate hike cycle of any major central bank in the post-global financial crisis era.

IG Client Sentiment Index: NZD / USD rate forecast (DECEMBER 8, 2021) (Chart 3)

NZD / USD: Retail traders data shows 68.26% of traders are net-long with a ratio of long / short traders of 2.15 to 1. The number of net-long traders is 4.61 higher % compared to yesterday and 8.48% compared to last week. while the number of net short traders is 13.17% higher than yesterday and 17.77% higher than last week.

We generally take a contrarian view of crowd sentiment, and the fact that traders are net long suggests that NZD / USD prices may continue to fall.

However, traders are shorter than yesterday and compared to last week. Recent sentiment shifts warn that the current NZD / USD price trend may soon reverse to the upside despite traders staying net long.

— Written by Christopher Vecchio, CFA, Senior Strategist