Central bank divergence on the radar: Hawkish RBNZ, Dovish BOC and SNB Central bank divergence on the radar: Hawkish RBNZ, Dovish BOC and SNB Central bank divergence on the radar: Hawkish RBNZ, Dovish BOC and SNB

Central bank divergence on the radar: Hawkish RBNZ, Dovish BOC and SNB

Forex 6 minutes to read
Charu Chanana

Head of FX Strategy

Summary:  Competitive pivots is the keyword for the FX markets currently, with Fed’s pushback to easing expectations priced in. RBNZ has room to stay hawkish beyond the Fed, while Bank of Canada, Swiss National Bank and the ECB could be seen moving ahead or in-line with the Fed. This sets up tactical FX opportunities in NZD crosses such as NZDCAD or NZDCHF. GBP could hold on to its gains for now, but faces risks of sharper reversal later if BOE is forced to cut rates earlier.


Markets have come a long way in their Fed expectations since the start of the year. Two rate cuts have been priced out for 2024, and less than 100bps is now priced in. This is now close to what the Fed expected in its December dot plot – 75bps of rate cuts in 2024. This could mean that dollar trends could remain uninspiring for now.

Source: Bloomberg

However, the delay in the first Fed rate cut expectation from March to June begs the question on whether Fed will be leading the rate cut cycle again. Some of the other economies such as Eurozone or Swiss face imminent recession threats, and their central banks may not be in a position to wait until mid-2024 to cut rates. While inflation has come down from the peaks everywhere, the move back to target will be determined by how sticky services inflation proves to be for different economies. In fact, rate hikes also appear to be back on the table, even though they remain unlikely. FX conversations, however, have shifted to competitive pivots and how central bank divergence could play out before we get into a synchronized central bank easing cycle.

RBNZ: a delayed pivot

New Zealand’s Q4 CPI came in as-expected on the headline but the higher-than-expected non-tradeable CPI was a key concern. Eight of the 11 main groups in the CPI basket increased in the quarter, led by rents, residential construction costs and local government land taxes. 2-year inflation expectations dropped to 2.5% in Q1, but the 1-year expectations remained above the 1-3% target range at 3.22%. This is key given RBNZ Governor Adrian Orr’s recent comments where he highlighted that bringing core inflation in-line with the 1-3% target range is important to bring inflation back down to 2% midpoint. This language seems more aggressive compared to most other G10 central banks that appear happy with the trend of inflation moving back towards the target and do not expect to wait until is comfortably within the target range. Slow deceleration in wage growth and further strength in migration continues to send an inflationary impulse, which means that RBNZ is unlikely to give up its hawkish stance at the February 28 meeting next week.

ECB and BOE: anemic growth outlooks

ECB is expected to start cutting rates in June, and Bank of England in priced in to go in August. However, both economies face recession threats which could dampen the price pressures materially and bring risks for both the central banks to cut earlier than expected. ECB could move ahead of the Fed, potentially in April, while the Bank of England will need to watch the persistent services inflation and wage pressures but could move in lockstep with the Fed around May or June. Governor Bailey’s recent comments were telling. He said that “we don’t need inflation to come back to target before we cut interest rates,” which is a signal that BOE could cut rates faster than market expectations.

SNB: leading the rate cut cycle?

Our previous article, titled Swiss Franc’s bearish view gets more legs, we talked about the faster-than-expected cooling in Swiss January CPI. Meanwhile, Swiss authorities are getting concerned about the impact of strong franc on the economy. Markets are still pricing in only around a 60% chance of a rate cut in March. If the SNB wants to stay ahead of the ECB in the rate cut cycle, then odds of a March rate cut could be higher from here.

RBA, BOC: tough to buy into pivot delay narratives

Canadian CPI fell faster than expected in January, questioning the narrative from Bank of Canada about the delay in a pivot. Headline inflation came in at 2.9% YoY, getting back in the 1-3% target range. Markets have however not fully priced in a June rate cut for now, and could be seen increasing the odds of a June, or even an April rate cut. Tumbling commodity prices and range-bound oil prices also offer little to support the Loonie.

RBA hawkishness is also still lingering, as evident in the meeting minutes this week. But markets are unlikely to price in any more tightening like in the case of RBNZ. Weak China dynamics and decline in iron ore prices will also continue to keep AUD under pressure, however any expansion in China’s stimulus measures could support or even push AUD higher.

FX implications

The US dollar is likely to trade sideways in this environment, when much of the hawkish Fed comments have been priced in but exceptionalism and high yields still continue to provide support to the greenback. This means that competitive pivot stories could create opportunities in the FX crosses, particularly to stay long NZD. Kiwi could gain on the back of delay in rate cuts, and it is a high-yielder, so will be a key choice for any carry trades diverting away from the USD. NZDUSD, but particularly long NZDCAD or NZDCHF could be interesting. Short AUDNZD, GBPNZD or EURNZD can also be considered, but these would be low conviction for now.

Bearish CAD trends could also be in focus, and CAD stands to lose not just against USD, but also against NZD and AUD. GBP has room to sustain strength now, but faces risks of a sharper reversal later.

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