Connect with us

Forex

Timing of Next Rate Moves for BOC, RBA, & RBNZ

Published

on


Central Bank Watch Overview:

  • Many central banks have reached the lower bound of interest rates – for now. Some central banks have even started quantitative easing (QE), which was avoided during The Great Recession.
  • The commodity currencies, AUD, CAD, and NZD, which typically benefit from their higher yield profile relative to other currencies (the carry trade), no longer hold this advantage.
  • Retail trader positioningsuggests that the commodity currencies may still have gains ahead of them yet.

Traits of Successful Traders

Traits of Successful Traders

Recommended by Christopher Vecchio, CFA

Traits of Successful Traders

Central Banks Keep Rates at Lowest Levels Ever

The coronavirus pandemic continues to rage, posing a unique threat to the global economy unforeseen since The Great Depression. G10 currencies’ central banks are acting in a more significant manner, announcing record low interest rates and asset purchase programs that were deemed ‘too extreme’ during the last crises, The Great Recession and Eurozone debt crisis.

It’s not just the major central banks like the Federal Reserve and European Central Bank either. Every single central bank associated with the eight major currencies covered by DailyFX are holding their main interest rates to all-time lows.

Although the commodity currencies no longer hold the relative yield advantage that defined ‘the carry trade,’ it still holds that these currencies – the Australian, Canadian, and New Zealand Dollars – retain significant economic exposure to agriculture and base metals, making them prime vehicles for speculation around a rebound in global growth.

Bank of Canada Rate Cuts Done for Now

The Bank of Canada’s efforts along the interest rate front may not be complete after all. Despite immediately cutting the main interest rate to an all-time low of 0.25%, the BOC has been offering some signals to the market that it may not be done yet. At the April BOC policy meeting, rates were kept on hold while new financial market stability mechanisms were announced in order to help keep credit flowing to businesses and households. Since then, interest rate expectations have slowly been dragged forward.

Bank of Canada Interest Rate Expectations (May 21, 2020) (Table 1)

Central Bank Watch: Timing of Next Rate Moves for BOC, RBA, & RBNZ

According to Canada overnight index swaps, rates markets think that the BOC is going to move on rates again by the end of the year, even if more is being done to gear-up extraordinary policy efforts. One month ago, through the end of the year, there was only a 5% chance of a rate cut materializing; now, overnight index swaps are pricing in a 55% chance of a 25-bps interest rate cut in December 2020.

IG Client Sentiment Index: USD/CAD Rate Forecast (May 21, 2020) (Chart 1)

Central Bank Watch: Timing of Next Rate Moves for BOC, RBA, & RBNZ

USD/CAD: Retail trader data shows 63.35% of traders are net-long with the ratio of traders long to short at 1.73 to 1. The number of traders net-long is 14.35% higher than yesterday and 114.33% higher from last week, while the number of traders net-short is 1.62% lower than yesterday and 35.17% 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.

Reserve Bank of Australia May Cut Rates Again

The Reserve Bank of Australia has already sliced its main overnight interest to an all-time low of 0.25% after five rate cuts over the past year, but markets feel that the RBA may not be done yet. After all, the RBA surprised some by announcing its own quantitative easing (QE) program, a step that was not taken during The Great Recession. This pursuit will achieve the goal of keeping the three-year bond yield at 0.25% for the next three years. It may take more to achieve this goal, however.

RESERVE BANK OF AUSTRALIA INTEREST RATE EXPECTATIONS (MAY 21, 2020) (TABLE 2)

Central Bank Watch: Timing of Next Rate Moves for BOC, RBA, & RBNZ

According to Australia overnight index swaps, there is a 53% chance of a 25-bps rate cut at the June RBA meeting. But given the commentary from RBA Governor Lowe suggests that the central bank is not prepared to move rates into negative territory, making any further rate cuts unlikely; the pricing may be a quirk due to the shape of the Australian bond yield curve.

To this end, the RBA has said that it will target the three-year bond yield at 0.25% – the same rate as the overnight cash rate – which is a reasonable assumption that the RBA will keeping its overnight cash rate at 0.25% or lower for at least the next three years. Like the RBNZ, lower rates may be coming soon for the RBA – just not quite yet.

IG Client Sentiment Index: AUD/USD Rate Forecast (MAY 21, 2020) (Chart 2)

Central Bank Watch: Timing of Next Rate Moves for BOC, RBA, & RBNZ

AUD/USD: Retail trader data shows 37.23% of traders are net-long with the ratio of traders short to long at 1.69 to 1. The number of traders net-long is 15.11% higher than yesterday and 5.27% lower from last week, while the number of traders net-short is 6.88% lower than yesterday and 10.90% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests AUD/USD prices may continue to rise.

Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed AUD/USD trading bias.

Reserve Bank of New Zealand Not Done Yet

The Reserve Bank of New Zealand convened an emergency meeting on March 16 to slash rates by 75-bps, cutting the main overnight cash rate to an all-time low of 0.25%. The coronavirus pandemic has not hit the New Zealand economy has hard as other developed economies, but that hasn’t stopped the RBNZ from going to its most extreme easing stance in its history in order to buffer the economy from contagion.

To this end, as part of the emergency interest rate cut, the RBNZ made clear that it would begin forward guidance, indicating that the main interest rate would stay at 0.25% for at least the next 12-months. But that doesn’t more can’t be done: the RBNZ noted that 0.25% “was currently the lower limit, given the operational readiness of the financial system for very low or negative interest rates.”

But at the May RBNZ meeting, the tone changed. “The committee noted that a negative official cash rate will become an option in the future, although at present financial institutions are not yet operationally ready,” the RBNZ said.“It was noted that discussions with financial institutions about preparing for a negative OCR are ongoing,” which “will become an option” in 2021.

RESERVE BANK OF NEW ZEALAND INTEREST RATE EXPECTATIONS (MAY 21, 2020) (Table 3)

Central Bank Watch: Timing of Next Rate Moves for BOC, RBA, & RBNZ

For now, markets are interpreting the commentary from the RBNZ that, while lower interest rates may be coming, they may not arrive in 2020. Through the last meeting of the year, the November RBNZ meeting, there is a 28% chance of a 25-bps rate cut – down from 37% one-month ago.

But against the backdrop where more dovish policy action has been hinted at by RBNZ Governor Orr, including extraordinary policy measures such as QE, then it would be shortsighted to dismiss the possibility of a rate cut arriving before the year is out.

IG Client Sentiment Index: NZD/USD Rate Forecast (MAY 21, 2020) (Chart 3)

Central Bank Watch: Timing of Next Rate Moves for BOC, RBA, & RBNZ

NZD/USD: Retail trader data shows 28.99% of traders are net-long with the ratio of traders short to long at 2.45 to 1. The number of traders net-long is 6.38% lower than yesterday and 38.03% lower from last week, while the number of traders net-short is 63.83% higher than yesterday and 73.31% higher from last week.

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

Traits of Successful Traders

Traits of Successful Traders

Recommended by Christopher Vecchio, CFA

Traits of Successful Traders

— Written by Christopher Vecchio, CFA, Senior Currency Strategist



Source link

Continue Reading
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Forex

USD/CAD Continues to Eye March Price Gap Ahead of Canada Employment

Published

on

By


Canadian Dollar Talking Points

USD/CAD holds near the monthly low (1.3468) as the Bank of Canada (BoC) keeps the benchmark interest rate at the “effective lower bound of ¼ percent” in June, but the update to Canada’s Employment report may influence the exchange rate as the economy is expected to shed 500K jobs in May.

USD/CAD Continues to Eye March Price Gap Ahead of Canada Employment

USD/CAD extends the series of lower highs and lows from the start of the month as the BoC announces that the “Bank is reducing the frequency of its term repo operations to once per week, and its program to purchase bankers’ acceptances to bi-weekly operations.”

Image of BoC interest rate

The decision suggests the BoC led by Tiff Macklem will scale back the dovish forward guidance as the central bank emphasizes that “any further policy actions would be calibrated to provide the necessary degree of monetary policy accommodation required to achieve the inflation target.

Image of DailyFX economic calendar for Canada

It remains to be seen if the update to Canada’s Employment report will influence the monetary policy outlook as the economy is expected to shed 500K jobs in May, while the jobless rate is projected to hit 15%, which would mark the highest reading since the data series began in 1976.

The ongoing deterioration in the labor market may put pressure on the BoC to further support the economy as “the level of real GDP in the second quarter will likely show a further decline of 10-20 percent,” but Governor Macklem and Co. may carry out a wait-and-see approach over the coming months as “the Bank expects the economy to resume growth in the third quarter.

In turn, the BoC may continue to rule out a negative interest rate policy as “the Bank’s programs to improve market function are having their intended effect,” and the central bank may alter the forward guidance at the next meeting on July 15 as the “decisive and targeted fiscal actions, combined with lower interest rates, are buffering the impact of the shutdown.”

With that said, the Canadian Dollar may continue to outperform its US counterpart as the Federal Reserveprepares to have the Municipal Liquidity Facility along with the Main Street Lending Program up and running in June, and the pullback from the yearly high (1.4667) may continue to evolve as USD/CAD snaps the range bound price action from April.

The Relative Strength Index (RSI) highlights a similar dynamic as the indicator tracks the downward trend from May, but the bearish momentum may abate over the coming days as the oscillator struggles to push into oversold territory.

Forex for Beginners

Forex for Beginners

Recommended by David Song

Forex for Beginners

Sign up and join DailyFX Currency Strategist David Song LIVE for an opportunity to discuss potential trade setups.

USD/CAD Rate Daily Chart

Image of USD/CAD rate daily chart

Source: Trading View

  • Keep in mind, the near-term rally in USD/CAD emerged following the failed attempt to break/close belowthe Fibonacci overlap around 1.2950 (78.6% expansion) to 1.2980 (61.8% retracement), with the yearly opening range highlighting a similar dynamic as the exchange rate failed to test the 2019 low (1.2952) during the first full week of January.
  • The shift in USD/CAD behavior may persist in 2020 as the exchange rate breaks out of the range bound price action from the fourth quarter of 2019 and clears the October high (1.3383).
  • However, recent price action suggests the pullback from the yearly high (1.4667) will continue to evolve as USD/CAD takes out the April low (1.3850),and the exchange rate may continue to exhibit a bearish behavior in June as the Relative Strength Index (RSI) extends the downward trend from the previous month.
  • Will keep a close eye on the RSI as it flirts with oversold territory, but the bearish momentum may abate over the coming days if the oscillator fails to hold below 30.
  • Need a break/close below the Fibonacci overlap around 1.3440 (23.6% expansion) to 1.3460 (61.8% retracement) to fill the price gap from March, with the next area of interest coming in around 1.3290 (61.8% expansion) to 1.3320 (78.6% retracement).

Traits of Successful Traders

Traits of Successful Traders

Recommended by David Song

Traits of Successful Traders

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong



Source link

Continue Reading

Forex

What is Fueling the Rally?

Published

on

By


Dow Jones, Nasdaq 100, S&P 500 Price Outlook:

  • The S&P 500 reclaimed the psychologically significant 3,000 mark last week
  • Meanwhile, the Nasdaq 100 continues to edge closer to the all-time highs it saw in February
  • The Dow Jones remains a laggard but has posted gains of its own in recent weeks

Dow Jones, Nasdaq 100, S&P 500 Forecasts: What is Fueling the Rally?

The Dow Jones, Nasdaq and S&P 500 have continued to melt higher in recent days even as bullish catalysts seem to sputter out. Following the initial crash in February and early March, gains were quickly established in what many believed to be a “bear market rally” as governments and central banks offered aid in many shapes and sizes.

Nasdaq 100 Price Chart: 4 – Hour Time Frame (February – June)

Nasdaq 100 price chart

In the weeks that followed, market pundits attributed the continuation rally to slowing coronavirus cases and the efficacy of quarantine procedures. Now the three equity indices are approaching prior levels, but more than 40 million Americans are unemployed, bankruptcies have been declared, supply chains have been disrupted and other fundamental concerns have been ignited. Still, the Dow Jones, Nasdaq and S&P climb. So what exactly is fueling this recovery rally?

Equities Forecast

Equities Forecast

Recommended by Peter Hanks

Get Your Free Equities Forecast

Well, to be sure, not every market move has to have a single and easily identifiable catalyst. Similarly, markets can stay irrational for extended periods of time, so gains can be built even when the underlying fundamental landscape may suggest otherwise. This phenomenon could be seen, at least to some degree, in late January and early February when it was becoming more apparent the coronavirus would become a global ordeal.

S&P 500, Crude Oil and Copper Daily Price Chart (August 2019 – January 2020)

Dow Jones, Nasdaq 100, S&P 500 Forecasts: What is Fueling the Rally?

Chart created with TradingView. Taken from Twitter.

While other equity markets, risk-sensitive currencies and commodities like crude oil plummeted, the three US indices trudged higher still. At the time, I noted the relationship between crude oil and the S&P 500, highlighting the infrequency of such a divergence.

At present, the catalysts for a continuation rally beyond all-time highs seem few and far between. Further still, domestic unrest will likely dent coronavirus recovery efforts and US-China tensions have soared. When taken together, it seems unlikely the Dow Jones, Nasdaq and S&P 500 will reach new heights, but other risk sensitive assets like the Australian, Canadian and New Zealand Dollars have rallied, exhibiting widespread risk appetite.

Forex for Beginners

Forex for Beginners

Recommended by Peter Hanks

Forex for Beginners

Thus, it can be argued US equity prices have become detached from their underlying fundamentals, but shorter-term trading involves price, not necessarily economic principles, and weeks of gains would suggest the current trend is higher still, however unfounded it may seem.

While I am of the opinion that some of these gains will have to be forfeited eventually, attempting to call the top at each leg higher is presumptuous. With that in mind, it may be prudent to wait on the sidelines until a catalyst can spark selling that is met with conviction if you possess a bearish bias, because it seems that none of the current threats have sparked such a move yet. In the meantime, follow @PeterHanksFX on Twitter for updates and keep close tabs on the price action in the days to come.

Starts in:

Live now:

Jun 10

( 15:06 GMT )

Recommended by Peter Hanks

Weekly Stock Market Outlook

Register for webinar

Join now

Webinar has ended

–Written by Peter Hanks, Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX



Source link

Continue Reading

Forex

Index Surges Through Price Gap, Can it Continue?

Published

on

By


FTSE 100 Price Outlook:

FTSE 100 Forecast: Index Surges Through Price Gap, Can it Continue?

The FTSE 100 surged to its highest level since early June on Wednesday after the equity index pierced a longstanding technical barrier around 6,200. The zone marked confluent Fibonacci levels and had worked to stall bullish attempts higher in the past, notably coinciding with the swing-high in late April. All in all, the ascending channel with which the FTSE 100 trades remains intact and passing through resistance allowed for bulls to capitalize on open air above.

FTSE 100 Price Chart: 4 – Hour Time Frame (March – June)

FTSE 100 price chart

With a price gap ranging from roughly 6,200 to 6,400, the bullish break above resistance at 6,200 opened the door to a quick continuation – due to the nature of price gaps – and the FTSE must now negotiate secondary resistance around 6,400. 6,400 aligns not only with the top of the gap, but also another Fibonacci level. With that said, the spot is likely to influence price, at least to some degree, in the days ahead.

Equities Forecast

Equities Forecast

Recommended by Peter Hanks

Get Your Free Equities Forecast

If sentiment shifts and risk appetite diminishes, the FTSE 100 may retreat from resistance at 6,400 and fall back into the 6,400 to 6,200 range. Since the gap was filled, price movement should be met with more resistance – regardless of direction. Either way, the FTSE 100 should now enjoy support from prior resistance at 6,200, and due to the level’s influence in the past, it may prove to be a vital staging ground for bullish attempts down the road.

FTSE 100
BEARISH

Data provided by



of clients are net long.



of clients are net short.

Change in Longs Shorts OI
Daily 7% -1% 3%
Weekly 14% -5% 3%

With the ascending channel intact and a series of higher-highs and higher-lows, FTSE 100 price action suggests further strength may be on the horizon. Coupled with IG Client Sentiment Data which reveals retail clients are net-short, it seems as though the shorter-term trend is leaning toward a continuation higher.

That being said, I have my reservations about current stock market activity and suspect the risk-reward relationship for many indices is currently skewed to the downside – a topic discussed at length in my webinar. Nevertheless, price is unemotional and unfeeling and recent price action is hardly a harbinger of bearish reversals so price may continue higher in the shorter-term regardless of the underlying fundamentals. In the meantime, follow @PeterHanksFX on Twitter for updates.

–Written by Peter Hanks, Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX



Source link

Continue Reading

Trending

Copyright © 2017 Zox News Theme. Theme by MVP Themes, powered by WordPress.