Rate Cut Odds Drop for ECB, RBNZ, and RBA as Global Growth Concerns Cool

Central Bank Watch Overview

  • More signs that the US-China trade was is moving towards de-escalation has market participants lowering their expectations for immediate, aggressive rate cuts by the world’s major central banks.
  • After the September ECB meeting, rates markets are pricing in a 62% chance of a 25-bps rate cut next month; prior to the September ECB meeting, there was a 61% chance.
  • Retail trader positioningsuggests AUDUSD rates and EURUSD rates may rally while NZDUSD rates may fall.

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More signs that the US-China trade was is moving towards de-escalation has market participants lowering their expectations for immediate, aggressive rate cuts by G10 currencies’ central banks, particularly the Reserve Bank of Australia and the Reserve Bank of New Zealand.

Following the September ECB meeting where “Super Mario” Draghi made an appearance, traders still don’t think that the ECB will be aggressive moving forward. The interest rate cut path is effectively unmoved. Elsewhere, ahead of the September Fed meeting, traders are pricing in a greater chance of a 25-bps rate hike than a 50-bps rate cut.

ECB Rate Cut Expectations Steady after September Meeting

Now that the ECB cut interest rates in September – meeting expectations, as overnight index swaps were discounting a 100% chance of a 10-bps rate cut – investors are quickly shifting their expectations for future policy moves. Given the tone deployed by outgoing ECB President Draghi, particularly around the forward guidance that leaves the door open to more rate cuts, interest rate markets are still pricing in more easing over the coming months.

European Central Bank Interest Rate Expectations (September 12, 2019) (Table 1)

Overnight index swaps are currently pricing in a 62% chance of a 10-bps rate cut at the October ECB meeting. If not, there is a 71% chance of a second 10-bps rate cut coming at the December ECB meeting. But this is the big move: whereas last week rates markets were pricing in three 10-bps rate cuts in September and October 2019 and January 2020; after the September rate cut, rates markets now see the next cuts coming in October 2019 and July 2020. That the third rate cut has been pushed back by six months may give the Euro some room to breathe in the short-term.

IG Client Sentiment Index: EURUSD Rate Forecast (September 12, 2019) (Chart 1)

Rate Cut Odds Drop for ECB, RBNZ, and RBA as Global Growth Concerns Cool - Central Bank Watch

EURUSD: Retail trader data shows 59.6% of traders are net-long with the ratio of traders long to short at 1.47 to 1. In fact, traders have remained net-long since July 1 when EURUSD traded near 1.1369; price has moved 2.6% lower since then. The number of traders net-long is 15.1% lower than yesterday and 11.6% lower from last week, while the number of traders net-short is 11.3% lower than yesterday and 5.1% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EURUSD 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 EURUSD price trend may soon reverse higher despite the fact traders remain net-long.

Read more: EURUSD, EURJPY Rates Rebound Off Lows after September ECB Meeting

RBNZ Rate Cut Odds Favor November 2019

The New Zealand Dollar has been able to claw back some of its August losses – it was the worst performing major currency last month – as risk appetite has been buoyed in early-September. Cooling tensions around the US-China trade have reduced the immediate need for an ‘insurance cut’ to cushion the New Zealand economy, if only slightly. Even though the New Zealand Citi Economic Surprise Index is down from 34.7 to 25.5 over the past four weeks – expectations around the timing of the next RBNZ interest rate cut have been pushed back.

Reserve Bank of New Zealand Interest Rate Expectations (September 12, 2019) (Table 2)

Rate Cut Odds Drop for ECB, RBNZ, and RBA as Global Growth Concerns Cool - Central Bank Watch

According to overnight index swaps, the odds of the RBNZ cutting rates in September have decreased since we last checked in, from 13% to 8% today. But rate markets still believe that a policy shift is coming in November, as overnight index swaps now imply a 63% chance, as opposed to a 67% chance last week, of a 25-bps rate cut in November – the last RBNZ meeting of the year. If there is another 25-bps rate cut over the next year, rates markets have pushed back the timing from June (52% last week) to August (51% today).

IG Client Sentiment Index: NZDUSD Rate Forecast (September 12, 2019) (Chart 2)

Rate Cut Odds Drop for ECB, RBNZ, and RBA as Global Growth Concerns Cool - Central Bank Watch

NZDUSD: Retail trader data shows 63.8% of traders are net-long with the ratio of traders long to short at 1.76 to 1. In fact, traders have remained net-long since July 23 when NZDUSD traded near 0.6699; price has moved 4.4% lower since then. The number of traders net-long is 4.1% lower than yesterday and 15.3% lower from last week, while the number of traders net-short is 16.0% lower than yesterday and 30.4% higher from last week.

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

Read more: US Dollar Fueled by Rising US Yields, Falling Fed Rate Cut Odds

RBA Rate Cut Odds Drop, Still Eye November 2019

Thanks to Australia’s two largest trading partners taking steps to de-escalate in the short-term, the Australian Dollar has been able continue its rebound off of its yearly lows established in August. It still holds that, thanks to the pause in the US-China trade war, there may be enough room for the Reserve Bank of Australia to hold off on cutting rates in the near-term, given the otherwise positive fiscal backdrop.

Reserve Bank of Australia Interest Rate Expectations (September 12, 2019) (Table 3)

Rate Cut Odds Drop for ECB, RBNZ, and RBA as Global Growth Concerns Cool - Central Bank Watch

The RBA is increasingly likely to keep interest rates on hold when it meets in October. When we checked in last week, shortly after the September RBA meeting, rates markets were pricing in a 44% chance of a 25-bps rate cut at the October RBA meeting. Now, there is a 27% chance of a 25-bps rate cut next month. If the RBA is going to cut rates, markets favor the November 2019 meeting – although those odds have fallen from 73% to 65% since last week.

IG Client Sentiment Index: AUDUSD Rate Forecast (September 12, 2019) (Chart 3)

Rate Cut Odds Drop for ECB, RBNZ, and RBA as Global Growth Concerns Cool - Central Bank Watch

AUDUSD: Retail trader data shows 57.2% of traders are net-long with the ratio of traders long to short at 1.34 to 1. In fact, traders have remained net-long since July 19 when AUDUSD traded near 0.6974; price has moved 1.6% lower since then. The number of traders net-long is 8.4% lower than yesterday and 19.9% lower from last week, while the number of traders net-short is 5.9% lower than yesterday and 5.4% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests AUDUSD 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 AUDUSD price trend may soon reverse higher despite the fact traders remain net-long.

Read more: 75 Years Later, The Lessons of Bretton Woods Have Been Forgotten

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— Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail at cvecchio@dailyfx.com

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