FX

AUD – The key event for markets over the weekend was the US attack on Iran which triggered a broad risk-off move across markets, with traditional safe havens like gold, CHF, oil, treasuries and the USD all strengthening. AUD/USD remains above its 2-week low of 0.7015, however has opened the week trading almost 1% below Friday's close at 0.7050. From here the outlook for AUD remains fuzzy - while Iran's leader has been confirmed dead, Trump stated that strikes could continue through the week and commented to the Daily Mail that the Iran war timeline would likely be a 4-week process. While our targets remain around 0.7250-0.7300, in the face of geopolitical uncertainty, AUD likely remains capped by its recent highs of 0.7147. Further, if a more aggressive and broad-based retaliation by Iran could bring sub-0.7000 levels into play. We would treat such a move as a buying opportunity.

US Jan PPI came in hotter than expected, revealing persistent inflationary pressures in US supply chains - specifically transportation and warehousing costs - which likely supports the case for a more measured, patient FOMC response. remaining on hold in the medium-term. Although, USTs rallied into last week's close following renewed haven demand sending US 10-year yield below 4%. Australia's Q4 GDP report this week headlines local calendars with last week's partials suggesting moderate growth in Q4 (market consensus is currently 0.7% q/q), which should lend some support to AUD/USD. RBA Assistant Gov. Hunter (Mon) and Gov. Bullock (Tue) speak this week as well, likely reinforcing recent comments around inflation remaining uncomfortably high, and a data dependent approach to ongoing policy.

By now the case for higher superannuation FX hedge ratios is compelling. FX hedge costs are now accretive to super funds and the price action itself (+7% YTD and a trend reset higher in AUD volatility) reduce the appeal of FX exposure as a portfolio diversifier for their global holdings. AUD's left tail is still there during equity stress ("Type A") risk-off events - the US-Iran conflict is a good example of this traditional correlation whereby AUD has sold-off in a risk-off episode. But the growing frequency of "Type B" episodes — Trump-induced, US-specific stress events where the USD no longer functions as a safe haven is contaminating the picture too. This is gradually eroding AUD's historically high tail-dependence hedge properties. The numbers are striking: the probability of AUD/USD falling during the worst 5% of S&P 500 outcomes has dropped to around 50% under the Trump era — essentially a coin toss — compared to 80% pre-Trump. The sample is admittedly short, only 15 months and contains relatively few genuine stress episodes, but the direction of travel is clear.

Our read of the deep pocketed long term pension fund community is that there is still a very strong inclination to sell USD rallies and hedge USD-exposure. "Value and diversification" is the geographic asset allocation mantra among the global pension investment community. This process will be slow and gradual, though we note that World MSCI-ex US continues to build on last year's outperformance into mid-Feb. Asia EM earnings/EPS expectations have surged in recent weeks, reflecting the unique combination of compelling value and AI exposure, which washes over AUD as a regional growth proxy. Andrew Hauser will be speaking on this topic of the USD as a "safe-haven" on Saturday morning (AEDT 5:30am) in New York.

Beyond this period of geopolitical turmoil, we would not be fading AUD strength on crosses. There are pathways that make a return to the mid-0.60s plausible - say a sudden sharp rise in Australia's unemployment rate and a dramatic pivot by the US Administration towards credibility restoring policymaking - but the subjective probabilities are very low. We are still targeting the 0.7250-0.7300 area 1-3mths. – KB + RF

NZD - NZD/USD 1 week outlook: lower; 3 month outlook: higher.

Events in the Middle East will likely dominate markets this week, and possibly beyond, depending on the duration of the war initiated on Saturday with the US/Israel attack on Iran.

The initial reaction from NZD/USD has been to fall around 0.5c to 0.5952 at this morning’s open. The recent support level at 0.5930 looks vulnerable, and there’s potential to test 0.5900 (a 50% retracement of the Nov-Jan rally) this week

NZ economic data this week is second-tier, mostly partial indicators of Q4 GDP. In the US, though, there’s monthly payrolls on Friday to watch.

Multi-month, we retain our bullish outlook targeting 0.62, conditional on the US-Iran war being short-lived. Our bullish rationale has been based on an expectation the economy continues to recover and local interest rates gradually rise. In addition, the US dollar’s safe-haven identity has likely been tarnished given events over the past year, and there is potential for further Fed easing. -IS

Rates

US Rates – USTs had already been rallying through Friday as markets became increasingly concerned about the situation in the Middle East. 2yr yields are at 4 year lows and 10yr yields easily breached 4% and are sitting at 3.93% as we write. That is the bottom of the recent yield range and it would appear certain that yields will fall further when the market re-opens. The next key levels will be the 3.85% reached on “Liberation Day”, followed by the 3.85% level reached in September 2024.

The real questions as we enter the week are how long will the safe haven bid for USTs continue and how low will it push yields? How quickly could the initial safe haven buying dissipate? What are the near and medium term implications for Fed policy and the inflation impulse arising out of higher oil prices? And what will that mean for breakevens? These are the immediate questions facing the market this week. We suspect that that the 60bps or so of cuts factored-in for 2026 will be remain and potentially be extended should the market begin to worry about a drawn out struggle, with its consequences for global growth. For now, markets are likely to assume a relatively quick resolution to the operation (Trump has announced a 4 week timetable, but kept the ultimate objectives blurry beyond a desire for regime change). So key data, such as this week’s payrolls data, will remain important to market outcomes.

Outright: In order to frame an answer to some of the questions posed above, comparisons with the Russian invasion of Ukraine are inevitable. So how did UST price action evolve at that time and what lessons could we learn that are apposite for the current situation? In yield terms, the invasion produced three clear phases there was an initial violent rally worth around 10bps at the 10yr maturity before the intraday move was pared back by around half. So to the extent that the safe haven bid was well in place during Friday’s session, the follow through move early this week should be met with profit-taking. In 2022 however, over the subsequent fortnight or so, USTs resumed their rally reflected a reflecting prolonged uncertainty (and the market moving from a re-pricing of Fed risks from hikes to cuts). Given that rate cuts are in the forward profile already that suggests the rally this time around will be more subdued and it price action will relate more to the second‑round macro implications for energy and growth, policy) as they become clearer.

With that in mind, the main focus will be the implications for a sustained increase in the oil price. That has both implications for inflation and growth and, indeed, during the Ukraine episode, real yields fell as breakevens rose and the curve steepened. That is a highly likely scenario this time around.

Curve: The mixture of growth and inflation implications is a near term curve steepener and that is also in line with our long-held medium term exposure to steepeners, driven by factors such as a more dovish Fed, ongoing large debt supply amid fiscal concerns.

10yr Spread to Bund: The spread has narrowed to the bottom of 3 month 130-140bp range. We expect any further US outperformance to be short-lived, but around a 5bp narrowing is likely from current levels. - DM

AU Rates – Following last week’s stronger than expected monthly CPI, the market debate around whether the RBA should quickly follow up their February hike has escalated. As to whether the RBA holds a similar view, there are 3 opportunities this week for key policymakers to evolve their message to markets. First, Chief Economist Sarah Hunter speaks, followed by Governor Bullock early in the week and then Deputy Governor Hauser at week-end. The events in Iran have seen market pricing for a May hike being pared back from being almost fully factored-in to now being a 75% chance. Beyond that there is only a further 6bps factored-in for the extended hike cycle. That is the least it has been since the RBA delivered its February meeting. So a quick reversal in risk aversion and/or a more hawkish RBA message could quickly change that pricing. A stronger than expected 4Q GDP release on Wednesday would also support that outcome.

Outright: In line with the UST-led rally, 10yr yields are now back at levels (4.58%) not seen since the RBA’s hawkish pivot in late 2025. So valuations are already looking a touch stretched and we are actively looking for the signal from price action to sell into this rally. That signal, of course, will be almost entirely UST led.

At the short end, 3yr yields have also fallen and we would suspect that an opportunity for those looking to manage their liabilities is in the wings (refer section below).

Curve: Maintain curve flattening exposure. It will be difficult for the short end to remove too much more hike risk and hence further safe haven related rallies will be felt more at the long end. We see more risks towards the short end driving further flattening, More medium term. aside from periodic re-calibrations of policy pricing, we think curve drivers still favour flattening impulses, as supply slows and global investor demand comes back into focus. In addition, a range-trading outright will encourage yield enhancement trades and that supports a flatter curve over the long term.

Swap Spreads: The geo-political environment has led to wider EFPs as the credit component deteriorates and the bond rally dominates. Beyond the near term drivers, the 3yr maturity will remain pressure wider if the recent reduced hike risk is reversed. At the long end, supportive flows for 10yr EFP compression will rely on drivers such as AU-US 5y5y narrowers and 5y5y outright continuing to attract more receive-side demand. The lower yield levels as a result of the safe haven rally will not be supportive of those flows.

Semi Spreads: Semis have been trading a touch heavily and the events of the weekend will not help. There is also the expectation of some supply coming near term, so we expect semi-bond spreads to widen over coming days. Even so, if we take a longer horizon, global investors continue to see merit in domestic spread products to express cross market trades. That of course is supported by the central RV attraction versus global credit that has been in place for some. So we continue to believe that spread widening will be capped and should be viewed as an opportunity.

10yr Spread to UST: There may not be a large subscription to narrowers anytime soon, but at some stage yield enhancement considerations will be a larger determinant than relative policy consideration. That time is not now. -DM

NZ Rates

NZ 2yr swap 1 week outlook: lower; 3 months: neutral.

The NZ 2yr swap rate rose to a cycle high of 3.17% in early February, and then corrected lower to 2.90% after the RBNZ warned markets against excessively pricing the next tightening cycle. The 2.90% level seems fair, based on our economic and OCR outlooks, but given there will likely be a long period until the first OCR hike (our economists forecast December), we wouldn’t rule out slightly lower levels during the months ahead. That possibility would be strengthened if the US-Iran war extends.

The OIS market prices a 0% chance of a rate hike at the next meeting on 8 April, and no material chance one until at least October. It is confident, though, of one by the December 2026 meeting which is over 100% priced.

The 2-10yr yield curve has flattened from the 120bp peak in December to 100bp currently, driven mostly by higher short maturity yields and relatively stable long maturity yields. Any decline in offshore bond yields this week due to US-Iran would weigh on longer maturity NZ yields and would flatten the NZ curve further. Longer term, we continue to expect significant flattening as we approach the RBNZ’s tightening cycle. Timing is critical, though, with carry and roll on a 2-10yr costing around 3bp per month. We hold a less risky (lower volatility and 0.5bp carry) flattener – a 2-5-10yr swap fly (entered 12 Dec at +17bp, target -5bp, current +9bp).

The trend decline in NZGB i-spreads (since the record high in April 2025) has stalled recently, with the 2036 currently at 39bp. We expect a break below 30bp eventually, but it will require either higher outright rates (our medium term view), positive NZGB supply news (possibly at the May Budget), or declines in UST i-spreads (uncertain). Near term, we see 10yr i-spreads above 40bp as a buying opportunity. By year end, assuming our predictions for outright rates and NZGB supply prove correct, a 10yr i-spread of 15bp-20bp is plausible. – IS

Funding, basis, and liability management

Domestic economic data in Australia remains firm, as the jobs data last week showed. This week sees the GDP data released, and there are also speeches from Sarah Hunter and Michele Bullock, both of which may take longer term views on the structural level of inflation.

Forward implied FX yields are at their highest for the recent run, the 6 month tenor now sits above 4.1%, but will shift lower today given the risk off environment. While OIS has not budged far post the CPI and speech from Governor Bullock, liability managers should note the higher beta of the 10 year swap rate to the OIS pricing. Notwithstanding the influx of cash to the bond market, which, all things being equal, can be responsible for a flatter curve and more stable yields, the risk that the Australian front end starts to consider March a viable option for a rate hike (house view is May) suggests prudent risk management is to add hedges. This may now only happen if the Iran situation cools.

Our view to actively engage in hedges was stronger last year, and we discussed on many occasions the level of the 1 year forward 3 year rate midding below 3.4% as an optimal hedge area. At around 4.2% today as a mid-rate, liability managers should be having the conversation around hedges, being 30bp off the recent highs in yield. There is no certainty to how long the war continues with Iran, but if oil prices stay high, yields are incompatible with a high oil price, so this should serve as some incentive to at least consider levels. Moreover, the flattening of the floating to fixed rate curve is a helpful shift.

In the Xccy basis market, the front page of Thursday’s Wrap covers off broader thoughts on the larger structural forces driving basis, including Super fund hedging, leveraged carry players, Kangaroo issuers and of course corporates and banks issuing offshore. The details look at the volumes of issuance from both sides of the issuer market YTD and, while that is a normal ratio, the volumes and flow (highlighted in a Bloomberg article on Thursday that quoted Morningstar Research) are having an impact. Earlier in the week, we discussed long end Xccy basis and the potential for a Semi deal. TCV did issue offshore, but in smaller size and in CHF, but it does highlight the opportunities to get funding when possible.

We know that QTC is set to borrow offshore in the months ahead, but tenor and size is not certain. Given the broader appetite for Semis amongst EUR denominated investors, and in the wake of a record breaking EUR3bn 10 year deal from Ontario last week, non-European sub sovereign paper is finding interest, which may in the end impact basis a little higher if the size talk is on the higher side. Corporate issuers might also use the appetite for Australian credit to issue offshore if prudent, but the notable change is the ease to issue in A$. This removes a prop for Xccy basis. -MW

Commodities

Crude

Joint U.S.–Israeli strikes on Iran over the weekend reportedly killed Supreme Leader Ayatollah Ali Khamenei and triggered a wider confrontation, with Iran launching missile and drone attacks across Israel, Bahrain, Qatar, the UAE, Kuwait and Iraq. Deaths and damage from the Iranian strikes were reported in Israel, the UAE, Bahrain and Kuwait. CENTCOM reported that three U.S. troops had been killed in the action. A U.S. fact sheet said forces had struck 1,000 targets in Iran over the weekend, with the U.S. targeting Iran’s command-and-control centres, air defences and ballistic missile sites, as well as IRGC headquarters.

Press reports that major oil firms and traders have begun suspending shipments through the Strait of Hormuz amid safety concerns, with the FT reporting that “insurers submitted cancellation notices for policies with prices set to rise as much as 50% for vessels traveling through the Gulf in the coming days”. The strategic chokepoint carries nearly 20% of global seaborne oil flows. About one fifth of global LNG trade originates in Qatar.

Three ships were reportedly hit near the mouth of the Strait of Hormuz, one of which was identified as an Iranian shadow tanker with the others identified as the MKD Vyom and the Skylight. Bloomberg reported state-run IRIB News reporting that the IRGC had struck three U.S.- and U.K.-owned tankers passing through the Strait of Hormuz. Bloomberg reported that “multiple ships reported on Saturday hearing radio broadcasts purporting to come from the Iranian navy announcing that transit through the waterway was banned”. However, UKMTO said in a Sunday update that “no official closure of Hormuz has been communicated through the official legal channels and that radio communications do not constitute a legally recognised closure”.

Over the weekend, the OPEC-8 group decided to raise production by 206 kbpd in April. This is part of the additional 1.65 mbpd that has been withheld since April 2023. Press has reported that the region has been preparing for direct conflict. The FT reported last week that “petrostates in the Middle East are rushing to export crude as they draw up contingency plans for potential U.S. strikes on Iran” noting that “Saudi Arabia has shipped about 7 mbpd this month, its highest since 2023, while oil exports from the UAE are set to hit a record 3.5 mbpd in February”. Bloomberg reported that “Iranian crude loadings hit the highest since 2018, and Iranian oil on water is at a record high”. The bulk of that buffer will have already left the region, helping to alleviate some near-term pressure on prices. However, as a result of various outages, production for that group has dropped circa 375 kbpd from the recent peak in November to February; hence it’s likely that the ramp-up will be slow, with the effective closure of the Strait severely impacting flows.

There have been no reports of oil infrastructure being hit outside of shipping. And the region does have important infrastructure to help bypass the Strait. The Saudi Aramco East-West Petroline travels across the country linking Abqaiq in the Eastern Province to the Red Sea port of Yanbu with capacity of 5 mbpd. In addition, ADNOC’s Habshan–Fujairah Pipeline exports directly into the Gulf of Oman / Arabian Sea and has capacity of approximately 1.5–1.8 mbpd. However, even with these pipes operating, the net impact of closure could be as much as 8–10 mbpd.

Hence, we have been arguing for the last couple of weeks that if Trump executed “limited military strikes” to try to force Iran into a nuclear deal, then we can see a push up to $75/76. If Iran retaliates and closes the Strait, then we can see another say $10 more, taking us to $85. Given the speed with which events moved over the weekend, and will continue evolving today and in coming sessions, we would certainly expect to see Brent spiking into the mid-$80s. If shipping or energy infrastructure in the region is directly targeted, the risks of another leg higher will increase.

Metals:

We continue emphasising that global copper inventory is surging as demand wanes due to extreme prices while copper hoarding continues in the U.S. Now China’s leadership emphasised the need on Friday for a “proactive macroeconomic stance to support the new five-year plan”. That saw a spike in metals on Friday. However, SHFE copper inventory surged to the highest since 2016. With COMEX inventory at all-time record highs, that means our measure of global copper inventory is at 20-year highs. Hence, we remain of the view copper is stuck in a $12,500 to $13,500 range.

USTR Greer recently confirmed that changes are afoot on steel and aluminium tariffs, though he did note that tariffs have been “very successful” and “they’re going to stay in place”. Bloomberg reported that “Administration officials have been working to narrow the scope of duties”. The “new scope” may thus see a shift to a minimum aluminium content or a defined HTS code-based tariff application. Now, the Midwest premium has continued ticking higher, having jumped to more than discount the impact of the tariff, implying that buyers are willing to pay up to meet last-minute requirements. In addition, the massive Mozal smelter (nameplate capacity 580 ktpa) will “definitely” be placed into care and maintenance from March 15 after the current power contract expires, according to S32. That will be a big hit of say 0.8% of global production but 1.5 to 2% of seaborne trade. Alcoa’s CEO noted that much of the ramp-up in Indonesian production this year will be absorbed through curtailments. With Chinese production capped, we estimate that weaker exports and stronger imports reduced China’s net aluminium supply to the rest of the world by roughly 0.8 Mt year-on-year. Throw in surging scrap imports, that lifts us to 1 Mt. Hence, until we get further tariff details, we appear stuck in a $3,000 to $3,200 range.

Gold:

We have been arguing for gold remaining in something like a $4,750 to $5,250 range near term. However, the weekend’s events argue for a breakout from that range. Were we to see Iran directly targeting shipping and energy infrastructure in the region, markets would quickly start to focus on the recent highs.

Iron ore:

With the so-called “Two Sessions” meetings in Beijing this week (the People’s Political Consultative Conference begins in Beijing Wednesday and the National People’s Congress on Thursday), steel production curbs come into effect. This normally supports steel and hence iron ore prices. However, with iron ore port inventory at all-time record highs and billet the same, we expect to see further weakness in prices into the low $90s in the months ahead.-RR

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