FX

AUD - Midweek caution creeps in, with a cool US reception to Iran's proposal and sticky oil prices weighing. Though, AUD's higher floor (0.7110–0.7125) hasn't been seriously tested. We're reading US-Iran as an iterative negotiation process right now, rather than signs of a breakdown. Iran is reportedly close to submitting revised proposals and back-channels are still open. UAE's exit from OPEC adds a new dimension to the energy disruption (negative oil?). AUD still has a decent chance of more time >0.7200 this week if today's Q1 CPI cements May RBA rate hike bets, though it probably shows up more durably in AUD/NZD, where new highs deeper into the 1.22s look likely. A softer CPI (less likely?) is not fatal. AUD/USD support in the low 0.7100s should hold. Our 3-horizon framework remains our operating guide.

1–2wks: suspended verdict - range holding, floor firming.

AUD's parameters are well-established: 0.7222 topside, 0.7100 downside, 0.6985–0.7000 the bigger line in the sand. The messy posturing of the last 2 wks is arguably more a case of "coercive bargaining" on full display, not genuine breakdown. The tell is that back-channels stayed open as positions hardened. Looking back risk assets arguably read recent posturing correctly throughout, navigating the noise and keeping the left tail compressed - repricing the uncertainty as "manageable". That said, a sustained break to new AUD highs still requires US acceptance and actual Strait reopening. But the floor is more durable than it looked a week ago as well, and our bias shifts from "don't overstay longs through 0.7200" to "the floor is better anchored." AUD longs in the 0.7080–0.7120 area look well-supported.

3–12wks: damage assessment phase, alert to compression.

A grinding, range-bound damage assessment window remains base case. Markets need to absorb the real economy and supply chain damage before AUD can make a decent sustained push higher. But the timeline arguably shortens if resolution proposals gather steam. A faster-than-expected resolution could cap the "damage phase". We have a 0.6900–0.7350 range for this window. The post-Liberation Day analogy still holds - an impulsive AUD rebound giving way to grinding containment - but this phase may prove briefer if the diplomatic track continues to move.

12wks+: AUD structural bullishness reinforced. The conflict has accelerated USD impairment - petrodollar architecture under stress, Gulf SWF reconstruction financing pressures building, and a questionably planned and executed war eroding long-term US confidence. This all points one way: de-dollarisation and long-horizon investors accelerating diversification/USD hedging. These dynamics require a lower-volatility backdrop to unfold, but the direction is clear.

Australia sits on the right side of an terms-of-trade shift for a world newly reminded of the cost of energy insecurity. The ~AUD100bn in net new AUD demand from superannuation hedge ratio "normalisation" we have been anticipating has been deferred, not denied (!)- and it should be released against a backdrop of structural USD weakness. 0.75+ is very plausible H2 2026. AUD upside likely unfold in the same manner as this year so far - impulsive & discontinuous, with significant ground covered sometimes in days. We envisage this washing over AUD crosses too. The key downside risk remains a meaningful deterioration in domestic growth/labour market, which would undercut yield support. -RF

NZD - NZD/USD 1 week outlook: neutral; 3 month outlook: neutral/bullish. NZD/USD remains hostage to Iran war developments, which have tracked inconclusively. That said, the NZD has been fairly resilient over the past few weeks, ranging between 0.5840 and 0.5930 – the break levels to watch near term. Local datawise, the monthly ANZ business and consumer sentiment surveys on Thu and Fri will be watched for war impact on activity and prices. Globally, the FOMC’s stance tonight will be important. For the quarter ahead, we retain a neutral bias pending resolution of the war. An escalation would likely cause a break below 0.5700, towards 0.5500, while a positive resolution would likely ignite a rally towards the 0.6000-0.6100 area. -IS

Rates

US Rates – Yields rose slightly across the curve, as oil prices continue to rise, although a strong directional trend is unlikely to develop any time soon. Uncertainty around the US/Iran conflict continues to impact risk sentiment and limit risk positioning. One thing appears certain, however - that price action will remain vulnerable to rapid momentum swings as sentiment shifts on increasingly erratic social media announcements.

Outright: USTs remain relatively range bound, albeit having explored the higher end of the yield range. 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 – Today’s monthly CPI will have its usual near term impact on price action, but it would need a dramatically lower than expected outcome to shift expectation for next week’s MPC significantly. Market pricing continues to maintain just over 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. 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 bond contracts have been exploring lower prices as global yields rise and the domestic policy risk remain hawkishly-skewed. We would cut our long held tactical short off current levels but will remain better sellers into strength. Beyond that, with a longer term lens, we are exploring the idea that a hawkish RBA will eventually 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: We continue to believe that spread widening will be capped and any similar moves 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.

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: higher; 3 months: higher.

Led by higher offshore rates, the NZ 2yr swap rate has broken above its month-long 3.35%-3.55% range, with potential to test March’s war-related high of 3.68%. Medium term, risks remain skewed to the upside, war-related inflationary pressures likely to keep market pricing for OCR hikes elevated. Near term, opportunistic receivers will occasionally cap yields, with 1y1y at 4.00% attractive to some.

The OIS market is firmer than a week ago, now pricing a 60% chance of a May OCR hike, a 100% chance by July, and almost four 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’s flattening trend since the peak in late December has extended, the 2-10yr swap at 77bp – lowest since April 2025 and down from December’s cycle peak at 120bp. We expect further flattening during the year ahead as we approach the RBNZ’s tightening cycle, the 2-10yr swap with potential to reach 50bp.

NZGB i-spreads remain stalled after declining from record highs in April 2025. Attractive carry/roll plus the 15 May 2026 maturity are countered by fiscal concerns ahead of the 28 May Budget. The 2036 i-spread is currently at 37bp. 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 above 40bp, but prefer to wait until the Budget has passed. -IS

Funding, basis, and liability management.

Outright markets continue to trade in a range that is drifting higher and making the cost for hedgers tough. Chasing the market at this stage is not so much futile but is certainly not going to result in great value for the hedger community. OIS for the RBA is peaking around 4.75% at the end of the calendar year, up around 10bp over recent weeks. In swap levels, the forward starting 1 year fwd 3 year swap is still reasonably high, just under 4.8% on a mid-market basis. Our target for hedgers would be to accumulate cover should we see a 15-20bp drop in yields from here, though admittedly, that might be a tough call to get there.

We have noted that the forward curves are flattening, albeit at elevated levels and that to us is the better way of thinking about hedging given the RBA is perhaps not even halfway through its current hiking cycle. Clearly today’s CPI, and the monthly data that comes from here is going to be the tone setter for markets.

In broader markets, we noted in Tuesday’s Wrap that the Xccy basis market is seeing a drop in the 5y5y area and a flattening of the 5s/10s curve. The potential for Kangaroo issuance is the driver and we do look for more of this in the weeks ahead as coupons come through. On the other side, Australian borrowers going offshore might be willing to extend on the curve on Xccy given that curve shape. Near term, month end hedging from the Super funds after a stellar set of returns in global equities will bring a better offer in the shorter tenors. -MW

Commodities

Crude:

We are now pretty much at the two-month mark since the Strait became technically closed. Over that period, the global economy will have lost somewhere between 720mb and 780mb of crude and product, and that is a conservative estimate.

Now the globally coordinated SPR release will have added roughly 3mbpd, while commercial inventories will have fallen by something in the region of 4mbpd to 5mbpd. That implies demand destruction in the order of 4mbpd to 5mbpd.

That demand destruction has tended to fall fairly heavily on SE Asia, which makes the FT piece that “China is poised to resume exporting jet fuel, gasoline and diesel from May” important. Large SOE oil companies have applied for export permits to ship fuel in May, signalling that a ban that was introduced in March may be relaxed. According to Kpler data, China was exporting almost 800kbpd, though that roughly halved in April. Normal exports would tend to comprise 250kbpd of diesel, 250kbpd of gasoline and 310kbpd of jet fuel. However, the FT noted that during April, some cargoes were shipped to Vietnam, Malaysia and Singapore, according to Rystad, which possibly reflected both “regional supply shortages and diplomatic considerations”. We have also heard that China has started tapping into its vast SPR which the EIA puts at 1.4TB (85/87 days of cover). This is an important development and one that should help to alleviate some pressure in the region.

In addition, the UAE issued a statement overnight confirming that it was leaving OPEC effective May 1. While the decision to announce during the ongoing Gulf War is slightly strange, the UAE Energy Minister told Reuters that the decision was taken “after a careful look at current and future policies related to the level of production”. Prior to the start of the war, the UAE was producing at circa 3.3mbpd, against a baseline of 3.219 and ADNOC had a self-reported capacity of 4.85mbpd and a target of 5mbpd. ExxonMobil is one of the largest investors in UAE with ADNOC, with UAE and Qatar comprising 20% of Exxon’s global production capacity.

Now, this does not change the current situation. However, the UAE has been the most heavily targeted Gulf nation during the war and will be looking to get ahead of the rush to win back market share when peace returns. We would not be surprised to see this acting as an investment accelerant. With the OPEC cap now gone, aspirations of 6mbpd by the end of the decade become much more feasible.

The above add to the idea Brent should remain capped above $110 for now. Last trading day for the June contract is COB tomorrow, so we switch to the July contract and in doing so ‘lose’ $6.89 of backwardation. In addition, the prospect of China allowing its SPR to release product into the Asian region and a rush to ramp up production once the war ends, should help to calm prices somewhat.

That said, we are beginning to see clearer signs of tightening in specific products and regions. US distillate inventories are now at their lowest seasonal level since 2022, and they will have drawn heavily last week too, while European jet fuel inventories have fallen to their lowest level since 2020.

The product picture has been made even tighter by refinery disruption. The fire at Russia’s Tuapse refinery was only extinguished on Friday, after five days. It normally produces around 240kb/d of products, including naphtha, diesel and fuel oil for export. Separately, Russia has cut off Kazakh crude flows of around 150-200kb/d through the Druzhba pipeline into Germany. Given German crude intake of approximately 1.8mb/d to 2.0mb/d, that represents roughly 8% to 10% of supply — clearly a significant disruption. Against that backdrop, the sharp rebound in fuels last week should not have come as any surprise. European Gasoil jumped 21% last week and Singapore Gasoil rose 26%. In the context of tightening physical balances, those moves are not surprising at all.

We continue to expect Brent to trade in a highly volatile $90-$110/bbl range in the near term. As long as flows through Hormuz remain constrained, the physical market — not paper benchmarks — will ultimately drive pricing, and real-economy fuel costs are likely to stay elevated for longer than the market currently anticipates.

Metals:

The incredible plunge in ShFE copper inventory from an all-time high mid-March to pretty much average levels for this time of year emphasises the recent pickup in demand. However, it may also be reflective of shortages of sulphuric acid and the moves by China’s tax authorities to increase oversight of invoicing deals to target fraudulent activity. The crackdown is said to have impacted copper, aluminium, and silver trading in Shanghai, with many firms having to pause business as local tax authorities carry out compliance checks. Traders need invoices to book revenue, claim VAT credits, and in commodity trades to act as proof of ownership and are often used to obtain short-term financing. Hence firms may be drawing down inventory as a result. That argues for copper being supported above $13,000.

We have been arguing for some time that we were ‘sleepwalking into an aluminium 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. 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. Meanwhile, nickel has surged to fresh 2yr highs, as reduced mining quotas from Indonesia and a global sulphur shortage tightens the supply outlook.

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. Near term technicals continue pointing lower and brief drop down towards $4,250/ $4,500 looks to be increasingly possible.

Iron ore:

Mills look as if they have concluded restocking ahead of the 5-day Labor Day holiday. With steel production in Q1 down 4.6%yy, and March down 6.3%yy, plus agreements in place between BHP and CMRG and FMG expected to reach a long-term deal “in coming months”, supply into the domestic market is ample. Hence, we see little upside for iron ore prices much above the $105/110 region. -RR

Westpac IQ

Things still looking pretty gloomy in consumer-land

2026 Federal Budget: What does it mean for business

Around the Grounds

Economics

Markets

Thought leadership

Browse topics