Central Bank Watch Overview:
- The Canadian Dollar has been on a losing streak since the October BOC meeting, when no rates moves were discounted over the next 12-months; now, a 25-bps rate cut is priced-in for April 2020.
- Weak Chinese industrial production data has hit the Australian Dollar, which has seen RBA rate cut odds rise in turn.
- Retail trader positioningsuggests that more weakness may be on tap for AUD/USD and EUR/USD, while USD/CAD could continue to rally.
After a run of exuberant sentiment, traders have begun to pare back their optimism. With signs that the US-China trade war talks are hitting a snag and Chinese economic data souring, market participants are once again pulling forward expectations for more easing from the G10 currencies’ central banks.
While the global economy remains on the path to avoiding a significant slowdown – a resolution between the world’s two largest economies would certainly constitute a step in that direction – traders are clearly signaling that they don’t think the “race to the bottom” may be over yet.
ECB Due on Hold for the Next Year
The Euro has been on a slow burn the past few weeks, steadily losing ground versus the safe haven currencies despite the fact that global equity markets have moved up to all-time highs. Yet the European Central Bank is decidedly not one of the G10 currencies’ central banks that is leaning heavily into a rate cut cycle.
With new ECB President Christine Lagarde seeking to clear divisions among ECB Governing Council members – a result of former ECB President Mario Draghi ramming through his easing package at the September ECB meeting – markets aren’t expecting any action from the ECB anytime soon.
EUROPEAN CENTRAL BANK INTEREST RATE EXPECTATIONS (NOVEMBER 14, 2019) (TABLE 1)
According to Eurozone overnight index swaps, market participants are discounting a pricing in a mere 1% chance of a 10-bps interest rate cut at the December ECB meeting. Two months ago on September 14, there was a 33% chance of a 10-bps cut in December. Traders are convinced that the period of recalibration by new ECB President Lagarde will take at least a year: there is a 36% chance of 10-bps rate cut in October 2020.
IG Client Sentiment Index: EUR/USD Rate Forecast (NOVEMBER 14, 2019) (Chart 1)
EUR/USD: Retail trader data shows 63.06% of traders are net-long with the ratio of traders long to short at 1.71 to 1. The number of traders net-long is 7.72% higher than yesterday and 33.16% higher from last week, while the number of traders net-short is 8.90% lower than yesterday and 21.81% lower 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. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EUR/USD-bearish contrarian trading bias.
Canadian Dollar Struggles as BOC Rate Cut Odds Jump
The Bank of Canada’s October policy meeting proved to be a pivotal moment for the Canadian Dollar, insofar as rate expectations have swung wildly in the interim period: whereas no rate moves were priced-in through October 2020 when the BOC met last month, rates markets are now favoring action in the first half of 2020.
Bank of Canada Interest Rate Expectations (NOVEMBER 14, 2019) (Table 2)
According to Canada overnight index swaps, the chance of a BOC rate cut over the coming months has increased materially since the October BOC meeting. Last week, there was a 15% chance of a 25-bps rate cut through the end of the year; now, markets are only pricing a 22% chance. But the bigger movement comes later on, where rates markets are now discounting a 25-bps rate cut in April 2020; this time last week, no rate moves were priced-in until at least September 2020.
IG Client Sentiment Index: USD/CAD Rate Forecast (NOVEMBER 14, 2019) (Chart 2)
USD/CAD: Retail trader data shows 39.93% of traders are net-long with the ratio of traders short to long at 1.50 to 1. The number of traders net-long is 3.46% higher than yesterday and 22.95% lower from last week, while the number of traders net-short is 5.54% higher than yesterday and 32.71% 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.
Australian Dollar Hit as RBA Rate Cut Odds Rise
Weak Chinese economic data has proven to be the fly in the ointment for the Australian Dollar, which had been otherwise riding high over the past few weeks amid signs that the US-China trade war was winding down. But now that the trade war negotiations appear to be hitting a snag, traders are coming around to the idea that the Reserve Bank of Australia will move forward with another ‘insurance rate cut’ sooner than previously anticipated, after having just cut rates in October.
Reserve Bank of Australia Rate Expectations (NOVEMBER 14, 2019) (Table 3)
According to Australia cash rate futures, there is a 70% chance that the RBA keeps its main rate on hold at 0.75% through the end of the year; this time last week, there was an 86% chance. Traders have dragged forward expectations of the timing of the next rate cut, after having relaxed throughout October. Now, overnight index swaps pricing in the next 25-bps rate cut at the February 2020 meeting (59%), up from May 2020 at this time last week.
IG Client Sentiment Index: AUD/USD Rate Forecast (NOVEMBER 14, 2019) (Chart 3)
AUD/USD: Retail trader data shows 61.78% of traders are net-long with the ratio of traders long to short at 1.62 to 1. The number of traders net-long is 6.99% higher than yesterday and 22.29% higher from last week, while the number of traders net-short is 9.98% lower than yesterday and 26.53% 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.
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— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail at [email protected]
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