FX Week Ahead – Top 5 Events: New Zealand, Canada, & UK Inflation Rates; BOC & ECB Rate Decisions

FX Week Ahead Overview:

  • Now in the second half of April, the economic calendar brings forth several data releases and events that historically invite more volatility to FX markets.
  • However, still at the onset of the coronavirus pandemic recovery, central banks are looking through inflation data and have proven resolute in their collective decision to keep interest rates low, perhaps taking some of the shine off of an historically busy calendar.
  • Overall, recent changes in retail trader positioning suggest that the US Dollar still has a bearish bias.

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04/20 TUESDAY | 22:45 GMT | NZD Inflation Rate (1Q’21)

Among all the major central banks, the Reserve Bank of New Zealand has perhaps the most hawkish posture given the shift in its remit a few months back. Now looking at housing prices as part of their monetary policy review, headline inflation indexes for New Zealand – released quarterly – may actually carry less merit in terms of potential impact on financial markets than the more frequent housing market is the coming periods. Nevertheless, with the New Zealand consumer price index set to show the headline inflation rate stable at +1.4% y/y in 1Q’21, the RBNZ still has the slack – the excuse – it needs to keep its main rate low, if only to prevent excessive appreciation by the New Zealand Dollar.

IG Client Sentiment Index: NZD/USD Rate Forecast (April 19, 2021) (Chart 1)

FX Week Ahead - Top 5 Events: New Zealand, Canada, & UK Inflation Rates; BOC & ECB Rate Decisions

NZD/USD: Retail trader data shows 35.58% of traders are net-long with the ratio of traders short to long at 1.81 to 1. The number of traders net-long is unchanged than yesterday and 25.91% lower from last week, while the number of traders net-short is unchanged than yesterday and 1.57% lower 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.

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 NZD/USD trading bias.

04/21 WEDNESDAY |6:00 GMT | GBP Inflation Rate (MAR)

The Bank of England isn’t expected to move on rates anytime soon, but now that the negative interest rate conversation has subsided, upside inflation pressures may fill the otherwise quiet void in terms of a driving narrative for the BOE. Like other developed economies that bore the economic brunt of the coronavirus pandemic in 2Q’20, a base effect is coming into play that should help send UK inflation rates higher for the next few months. According to a Bloomberg News survey, the March UK inflation rate is due in at +0.8% from +0.4% (y/y), while the core inflation rate is due in at +1.1% from +0.9% (y/y).

IG Client Sentiment Index: GBP/USD Rate Forecast (April 19, 2021) (Chart 2)

FX Week Ahead - Top 5 Events: New Zealand, Canada, & UK Inflation Rates; BOC & ECB Rate Decisions

GBP/USD: Retail trader data shows 54.04% of traders are net-long with the ratio of traders long to short at 1.18 to 1. The number of traders net-long is unchanged than yesterday and 22.27% lower from last week, while the number of traders net-short is unchanged than yesterday and 7.27% 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.

The combination of current sentiment and recent changes gives us a further mixed GBP/USD trading bias.

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04/21 WEDNESDAY | 12:30 GMT | CAD Inflation Rate (MAR)

According to a Bloomberg News survey, the January Canada inflation rate (CPI) is forecasted to show an increase of +2.3% from +1.1% (y/y), while the core reading is due in at +1.4% from +1.2% (y/y). The data are consistent with what’s being experienced across developed economies, whereby the base effect around the onset of the pandemic is starting to produce a meaningful (yet likely fleeting) uptick in price pressures. Alas, even though Canada inflation rates are running higher, the Bank of Canada, much like other major central banks, seems highly unlikely to act soon – nor will they when they make public their April rate decision later in the day.

IG Client Sentiment Index: USD/CAD Rate Forecast (April 19, 2021) (Chart 3)

FX Week Ahead - Top 5 Events: New Zealand, Canada, & UK Inflation Rates; BOC & ECB Rate Decisions

USD/CAD: Retail trader data shows 66.46% of traders are net-long with the ratio of traders long to short at 1.98 to 1. The number of traders net-long is unchanged than yesterday and 0.36% higher from last week, while the number of traders net-short is unchanged than yesterday and 14.00% 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.

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 USD/CAD trading bias.

04/21 WEDNESDAY | 14:00 GMT | CAD Bank of Canada Rate Decision

The BOC meets on Wednesday for its April policy meeting. Like for the RBA and RBNZ thus far this month, it seems prudent to expect further pushback against the recent rise in global bond yields, with ensuing commentary expected to heap praise on stability in interest rates over the intermeeting period. Even as BOC Governor Tiff Macklem has noted concern about rapidly rising house prices, rates markets aren’t seeing a future where the BOC sees its objectives changed anytime soon.

Bank of Canada Interest Rate Expectations (APRIL 19, 2021) (Table 1)

FX Week Ahead - Top 5 Events: New Zealand, Canada, & UK Inflation Rates; BOC & ECB Rate Decisions

The ebb and flow of BOC interest rate expectations is not atypical. Even though at the start of April there was a 2% chance of a 25-bps rate hike through the end of the year, Canada overnight index swaps are now pricing in an 18% chance. But in late-February, markets were pricing in a 16% chance of a rate hike by the end of the year. All-in-all, the BOC remains on the same path it has been, and will remain on that path for the foreseeable future.

04/22 THURSDAY | 11:45, 12:30 GMT | EUR European Central Bank Rate Decision

When the ECB meets this Thursday, there are two sets of comments in recent weeks that provide context to the rate decision. The first comes from mid-1Q’21, when the ECB acknowledged that “if favorable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full.” ECB President Christine Lagarde has reinforced the idea that the ECB stands to provide ongoing support, with or without the PEPP.

The second set of commentary revolves around rising yields, to which ECB Governing Council member Klaas Knot has said “what the market is actually doing is pricing that optimism” about a recovery in the second half of 2021. Now that global bond yields have settled down, it may be the case that the ECB feels less pressure to make any changes – even incremental – and rather save its ammunition for later.

EUROPEAN CENTRAL BANK INTEREST RATE EXPECTATIONS (APRIL 19, 2021) (TABLE 2)

FX Week Ahead - Top 5 Events: New Zealand, Canada, & UK Inflation Rates; BOC & ECB Rate Decisions

According to Eurozone overnight index swaps, stability in global bond yields influenced a softening in ECB interest rate cut expectations. In mid-January, there was a 54% chance of a 10-bps rate cut by December 2021; that probability now stands at a comparatively meager 15%. This is stark change in from where we were at the end of 2020, when rates markets were pricing in a 10-bps rate cut in July 2021.

— Written by Christopher Vecchio, CFA, Senior Currency Strategist