FX

AUD – AUD and markets settling into range-bound suspended animation. The ceasefire is holding - self-imposed on the US side - but there are no 2nd round talks scheduled. While this unhappy impasse/equilibrium persists there's next to no chance for any follow through upside that sees AUD nearer 0.7200+. The downside is contained too. Impasse does not immediately imply we rush back to conflict, despite the rhetoric, so we don't need to meaningfully reprice that tail either. AUD is not in a fundamentally new regime. Our 3-horizon framework remains in place:

• 1-2wks: respect the rally, a new elevated range, don't overstay it.

AUD/USD's short-term parameters are well-established - Friday's the "Strait is completely open" highs at 0.7222 and Monday's gap lows (0.7117) define the operating range. The big line in the sand though remains 0.6985–0.7000. US-Iran communication evidently remains active, meaning while there's a public hardening of positions, back-channel engagement is unfolding. The left tail can mostly stay in check here. At the same time, a sustained break through 0.7200 requires what we don't have: a pathway to seeing a durable Strait reopening - clearer negotiating timetables and a durable resolution that goes beyond ceasefire. The rally in this window AUD has been all about compressing escalation probabilities, not ultimately removing them, which ultimately caps things.

• 3–12wks: damage assessment phase

A grinding, (wider) range-bound damage assessment phase is still the more likely path in this window: markets will need to absorb the real economy impacts - global growth, supply chain disruption, how much shipping through the Strait recovers — before AUD can make a sustained move (higher). We maintain a widened 0.6800–0.7350 range to reflect the breadth of outcomes still in play here, both sustained Strait closure and episodes of higher Strait shipping passage. The post-Liberation Day price action - initial impulsive rebound giving way to rangey "containment" for a few months - is a very apt analogy.

• 12wks+ AUD structural bullishness reinforced.

The conflict has accelerated USD impairment across a bunch of channels - the petrodollar architecture is stressed, Gulf SWF pressures around reconstruction financing, and a questionably planned and executed war eroding long term confidence. This all points one way: de-dollarisation and long horizon investors accelerating diversification and USD hedging activities. These dynamics are not imminent and require a lower-volatility backdrop to unfold though.

Australia sits on the right side of an energy terms-of-trade shift for a world newly reminded of the cost of energy insecurity. The approximately AUD100bn in net new AUD demand from super fund hedge ratio “normalisation” we have been expecting in 2026 has been deferred, not cancelled - and it should be "released" against a backdrop of structural USD weakness. 0.75 is still plausible in 2026H2. The main risk to our view would be a notable cooling in domestic growth and the labour market, upending yield support for AUD. - RF

NZD - NZD/USD 1 week outlook: neutral; 3 month outlook: neutral/bullish.

NZD/USD has consolidated around 0.5900 during the past week, amid war developments in both directions but with little net substantial change. Locally, there was a mixed bag of data updates – slumping business confidence, higher headline inflation, and steady core inflation, which has left OCR pricing higher than it was last week. We retain a neutral bias for the month ahead pending resolution of the war. An escalation would likely cause a break below 0.5700 support, towards 0.5500, while a positive resolution would likely ignite a rally towards 0.6000 resistance. For year end, we lean towards an assumption of war de-escalation, which would pare the USD’s current safe haven premium, and in turn support NZD/USD towards 0.60.- IS

Rates

US Rates – Uncertainty around the state of play in the US/Iran conflict led produced a modest “risk off” atmosphere overnight. The ceasefire appears to be holding but there remains significant ambiguity around the state of negotiations, with the Strait of Hormuz essentially closed and Iran calling the blockade an act of war. That has left global markets very little to confidently express a directional trend and risk positioning is limited. One thing appears certain, however, that volatility will remain a feature of price action as momentum swings on increasingly erratic social media announcements.

Even so, the market, perhaps naively, but seemingly consistently, continues to be optimistic that a deal to end the conflict is not far away. That in turn suggests that periods of extreme risk aversion will continue to be short-lived. That optimism - that the conflict will soon be over without any medium term damage to global growth or supply chains - has been a feature of price action since the conflict began. When initial timelines fail, the market just kicks the can down the road a plausible distance and goes on believing the narrative of a positive outcome relative to the worst-case scenarios. Whether that is a valid or logical way to approach risk taking is up for debate, but it is certainly evident in the fact that US equity markets are actually higher than before the first bombs hit Iran.

Outright: USTs remain relatively range bound, with a tendency to explore lower yields, but also a reluctance to completely retrace the moves made since the conflict in Western Asia began. Even so, we continue to view medium term risk rewards as skewed toward higher yields. It will take some time for oil prices to fall and the costs associated with the conflict to date have yet to be fully felt. Inflation will remain high and issuance will be increasing in line with an accelerated military spend relative to budget.

Curve: We remain biased toward a steeper curve. Medium term, the mixture of inflation risks and growth concerns, along with the issuance implications of higher military spending (even if it is to rebuild ammunition stocks), should manifest itself in a steeper curve over time.

10yr Spread to Bund: We see few reasons why the US should significantly outperform, so near term we expect the recent narrowing to reverse and the spread to remain above 130bp. - DM

AU Rates –Market pricing continues to maintain around two hikes by year end and in our view that is the minimum that should be factored-in given both the domestic inflation outlook and global risks to expectations. Despite last week’s data pointing to a major deterioration in consumer and business confidence, the message from RBA Deputy Hauser continued to lean hawkishly despite the acknowledged global uncertainties. We expect the RBA will continue to focus more on inflation risks over growth fears as it is imperative for inflation fears to remain well-anchored.

Outright: Both contracts have pushed lower within the range established since the war began and are currently close to mid-range. That reflects the difficulty in establishing a risk position with any conviction. Even so, we will remain better sellers into strength and would hold tactical shorts off current levels.

Beyond that, with a longer term lens, we are exploring the idea that a hawkish RBA will provide a headwind to any ongoing yield rises. That is, each successive rate hike will see longer tenor yields capped and potentially even move lower. However, the projected hikes have not yet been delivered and the global inflation backdrop also prohibits us from a more bullish outlook.

Curve: We have been recommending curve flattening exposure for some time supported by our RBA forecast of 3 more hikes. Flattening is also supported medium term by the expectation that any sustained normalisation in risk conditions should see global investor demand comes back into focus and yield enhancement trades will support a relatively flatter curve over the long term. The biggest risk is a surge in global long end yields beyond the levels traded over recent months.

Swap Spreads: We see EFPs as largely directional at the moment. For now we expect both benchmark EFP spreads to remain within recent ranges.

Semi Spreads: Semis have been exhibiting volatile price action as global credit concerns wax and wane but overall demand remains strong in the face of recent supply. So we continue to believe that spread widening will be capped and should be viewed as an opportunity. As we approach the state and territory budget season (Victoria, NT and WA are due in the first week of May) there will be an increasing focus on fiscal priorities and the implications for issuance and ratings. The needless damage to global oil infrastructure and its associated costs will make fiscal repair a more difficult task, as will any cost of living concessions to support consumers and business. A further focus will be on the costs associated with the Federal Governments decisions around the NDIS and health funding. We will find out more about that today.

10yr Spread to UST: We have been noting that we are watching price action very closely with a view to entering narrowers and some small narrowing exposure has been recommended. We would not add to that position at present, however, given both the domestic policy risks and the renewed global risk aversion that is likely to surge as we begin the week. - DM

NZ Rates - NZ 2yr swap 1 week outlook: neutral; 3 months: higher.

The NZ 2yr swap rate continues to consolidate between around 3.35% and 3.55%, following March’s war-related surge to a 17-month high of 3.68%. Risks remain skewed towards a retest of the 3.60% area during the quarter ahead, war-related inflationary pressures likely to keep market pricing for OCR hikes elevated. But near term, opportunistic receivers will likely cap yields at 3.55%.

In the wake of the upside surprise from Q1 CPI data yesterday, OIS rates are higher, fully pricing an OCR hike by July (and even 45% of one by May) and over three hikes in total by year end. That is more aggressive than our economists’ forecast of hikes in September, October and December (and beyond).

The yield curve flattening trend since December has extended slightly, the 2-10yr swap currently at a cycle low of 82bp (from the 120bp peak in December). We target around 65bp during the quarter ahead, and around 50bp by year end. Carry/roll is costly, though, at around 4bp/mth, emphasising timing. We would consider entry into fresh flatteners on any bounces to around 95bp.

NZGB i-spreads remain stalled after declining from record highs in April 2025, although there could be some performance during the next few weeks given large coupon payments, the 15 May 2026 maturity, and benchmark duration lengthening. Last week’s tender was strong. The 2036 i-spread is currently at 38bp. A sustained break below 30bp will require either a sustained rise in outright rates (which is our medium term view), positive NZGB supply news (the May Budget will update projections), or declines in UST i-spreads (uncertain). We would be buyers at around 40bp.

Last week we published a trade idea to buy the NZGB 2027 and pay OIS, funded by RRP capped at OCR+10bp. The expected return of at least 17bp is almost risk-free (the chances of the RBNZ withdrawing or amending the RRP facility within the next 12 months are near zero). While primarily a buy and hold trade, there is also trading potential if the NZGB-OIS spread contracts over time as we expect (this process has already started).– IS

Funding, basis, and liability management.

Another day, another deadline passes and a new one is pushed out. Markets are losing focus on this, and outside of oil and its moves dictating the up and down of yields, the broader story is little moved. Equities have hit record highs, sovereigns and corporates are all borrowing with ease as credit spreads come back in.

For now, inflation is still the preeminent narrative, and the fact equities or yields haven’t moved sharply suggests that growth is not yet on the agenda for investment.

In Australia, the maturity and cash flows were paid yesterday and there have been some new names come to market, but it is not that consequential just yet. Canadian names have been active at home, in EUR and USD, but as yet have not issued into the Kanga market. Basis markets are not moving much, but there are some good two way flows taking place. CBA hit the short end of USD overnight, Goodman was in USD 10s and 20s (this may not be swapped) while AFL is issuing an AUD 10 year deal today. The big gains in equities this month will be on the radar for hedgers at month end, and we highlighted this by looking at the shape of the Xccy basis curve which has flattened. The curve is the flattest it has been in around 9 months, and with little carry against you it might be ripe for a steepening in the coming months. We detailed this and a chart in Friday's Wrap.

In outright and curve, the AUD market is not giving clear directions. There is a bias for flattening if the RBA stays hawkish, and the price rise stories we have heard through anecdotes and data suggests there is no backdown until the May meeting is done. FX/OIS basis is steady in both AUD and NZD, with the extra cash in the market from maturities and coupons. -MW

Commodities.

Crude:

We are now into day 52 of the Strait being technically closed. If we assume a conservative 12mb of crude production lost as a result, that’s a truly staggering 612mb that have been lost to the global economy – permanently.

How much crude is that? Wood Mackenzie put it very well. That’s the equivalent of no air travel anywhere in the world for 10 weeks or no road travel for any vehicle anywhere in the world for 11 days. It’s also the same as no oil consumption in the US or all of Europe for a month according to Reuters.

Now markets continue taking a mature and reasoned response to this staggering loss of supply. The June Brent contract is only just below $100 versus a peak of $112 in the second week of April. Dated brent (Brent for delivery 10-15 days out) is only $107.63, versus a peak of $144.46 in the second week of April. Early May barrels are being offered at circa $11 versus a peak of $22+ in the second week of April. So we are well off the highs of say $167 for Brent on a boat, CIF, in the second week of April.

Now some of this is just financial barrels weighing down prices. This makes sense. Being long Brent above say $105 leaves you exposed to the ‘after the close Truth Social’ stop loss run. Some of this is also coming from the huge inventory that we had built up, with Russian/ Iranian and Venezuelan barrels trapped at sea being de-sanctioned. Some is also coming from demand destruction, particularly in SE Asia.

However, some of it is also driven by the fact that there are, as yet, no clear signs of a big hit to global product inventory when we look around the world. Australian gasoline stocks were up to multi year highs close to 2ML last week; Singapore light distillate stocks were close to multi year highs last week; Chinese gasoline and diesel inventory has rolled over in recent weeks, but remains well away from levels that would be considered low; US gasoline and total petroleum product inventory is still above average levels for this time of year. Hence our global refined product inventory proxy is only just at average seasonal levels, despite the massive loss of crude barrels over the last 52 days.

However, we know that those barrels have been lost, and we are beginning to see some signs of inventory dropping for some products in some geographies. US distillate inventory likely dropped to the lowest seasonal level since 2008 last week. European jet fuel inventory is at the lowest seasonal level since 2018.

Now these are not the ‘nothing left in the tanks’ levels that some might have feared. But we are just beginning to see some early signs. And it will get a lot worse, once we consume floating (Russian/ Iranian/ Venezuelan) storage plus SPR releases. That flow only lasts so long, and when it does, product inventory starts to fall, and prices start to rise. This is something we are still waiting for, knowing it will happen.

Further, even under an optimistic scenario where the Strait reopens imminently, normalization will not be quick. We estimate that 10–12mb/d of crude production remains shut in, alongside 3–5mb/d of product exports. Restarting those flows is not simply a function of reopening shipping lanes.

Operators must first clear storage and tank tops - a step that typically only occurs once confidence in a durable ceasefire is established. The subsequent restart process is complex and slow, with risks of wax blockages and gas build-up in wells. Some production losses may prove permanent.

At the same time, logistics remain dislocated. Crews and vessels are out of position. While discharge itself takes 1–2 days, port congestion and storage constraints mean it can take several weeks to clear a backlog of floating cargoes after a major disruption.

Refinery damage across the region is material and will take months to repair. Kuwait Petroleum Company issued another force majeure notice covering sale of crude oil and refined products on Friday, taking into account that it will take time to recover production once hostilities ease. Indeed, Kuwaiti officials have confirmed that it will take a “few months” from the end of conflict to return to pre-war production levels.

Hence, a return to normal conditions is likely measured in months and quarters, not the days and weeks financial markets appear to assume, even if a ceasefire is extended and we see an eventual end to the Gulf war.

Hence, we expect Brent to continue trading in a highly volatile $90–$105/bbl range in the near term. As long as Hormuz flows remain constrained, the physical market - not paper benchmarks - will ultimately drive pricing, with real-economy fuel costs likely to remain higher for much longer than markets appear to be expecting.

Metals:

Copper looks well supported above $13,000 on optimism that we may be approaching an end to hostilities in the gulf and the potential impact of a sulphur shortage given that production in Chile, Peru and the DRC is dependent on sulphuric acid. One third of the world’s sulphur comes from the Gulf, where it is produced from oil and gas refining and gas to liquid processing. China has also indicated it will curb sulphuric acid exports. The plunge in ShFE inventory from an all-time high mid-March to closer to average levels for this time of year emphasises the incredible surge in demand there. Hence copper looks set to hold above $13,000.

The crisis in aluminium appears to be deepening. We have been arguing for some time that we were ‘sleepwalking into a deficit’ well before the Gulf war started. With both the 1.5Mtpa Al Taweelah smelter and Alba’s 1.6Mtpa operations taken offline by drone attacks late March, that deficit has increased markedly. Wood Mackenzie is arguing the deficit this year could be as much as 4mt. Bloomberg reported that Japan’s reliance on the Middle East for aluminium means that auto and parts makers such as TMC have had to cut production. Domestic Japanese carmakers get about 70% of their aluminium imports from the Middle East. The IAI reported that aluminium production from GCC countries fell 6.1%mm, dragging global production down by 0.3%mm. We have been arguing for higher prices for some time now, so we are not surprised by recent price action, and expect to see further price gains as we move through 2026 towards the 2022 highs, though optimism surrounding developments in the Gulf should cap much above $3,600.

Gold:

We have been arguing we don’t see prices much above $4,850 for now. Rising inflation concerns don’t help the outlook for gold. That’s especially the case if it takes weeks/ months for a US Iran peace agreement.

Iron ore:

Rio reported iron ore production at 78.8mt in Q1, up 13% from the same period a year ago. That was the second highest Q1 production since 2018, despite two cyclones shuttering ports during the period. Meanwhile BHP Q3 WA iron ore production came in at 69.65mt, up 2.8%yy. Meanwhile, BHP confirmed it had “concluded iron ore sales contract negotiations with the China Mineral Resources Group”. Hence, BHP cargoes held up at port have reportedly started discharging since last Tuesday. This appears to be capping prices. However, there is chatter of restocking ahead of the 5-day Labor Day holiday, though with steel production in Q1 down 4.6%yy, and March down 6.3%yy, we see little upside for iron ore prices much above the $105/110 region. - RR

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