FX

AUD –AUDUSD gained almost 1% on Friday leading the gains across G10 currencies, following the 3.8% surge in TWD which emerged on signs of easing trade tensions between the US and China coupled with the sharp rally in Taiwan's stock market. AUD reached new YTD highs around 0.6470 in line with the bid pressure across Asian currencies, namely KRW and IDR which gained almost 1% on Friday, however these gains moderated on the news that Taiwan's central bank had intervened to stabilise the sharp decline in USDTWD. Furthermore, a stronger than expected US payrolls, which printed at 177k for April (vs exp 138k), saw Fed rate cut expectations pared back for June, further stabilising the bid pressure in AUD.

Key data for markets this week will include the May US Monetary Policy Meeting as well as global PMIs data. While markets broadly expect US rates to be held where they are, we are starting to see signs of dwindling US exceptionalism seeping into the US hard data. Last week's US GDP numbers signalled a contraction of 0.3% in Q1 and while April payrolls outperformed market expectations, payrolls were revised down by 58k across February and March.

We see limited crash risk for AUD moving ahead as negotiations between the US administration unfold with high level MOUs already close to completion with India, and ongoing talks with South Korea and Japan. However US officials have previously stated that any meaningful trade agreements will take months to reach and so we see a high likelihood of these 90-day tariff reprieves being extended beyond mid-July. Beijing is reportedly evaluating and offer from the US to commence negotiations, however China's Commerce Ministry has warned against the US engaging in "extortion" and "coercion". We see AUD remain comfortably above 0.64 with key support around 0.6370 in the near-term.- KB

Majors- DXY has opened the week below 100.00, continuing losses from the sharp sell-off seen against TWD on Friday. This weakness in USD has rippled across currency markets with AUD, SEK and CAD among the top performers week-on-week. We see key near-term support for DXY around 98.90 leading into this week's FOMC. While markets broadly expect US rates to remain on hold, we expect a more hawkish rhetoric from Powell on account of a likely increase in the Fed's inflation forecasts as a result of April 2 reciprocal tariffs. This should see DXY above 100.00 in the near-term.

AUD/JPY atmospherics have shifted materially with the pair gaining beyond 93.00 in recent days, and we no longer anticipate a breakdown below 90.00 on a 1-2mth horizon. The BoJ’s winding back of 2025/2026 growth forecasts and pushing back the expected timing when price targets are realised represent a big step backwards for the BOJ policy normalisation narrative. We anticipate an AUD/JPY rebound towards 94.00 on a 1-3mth horizon.

EUR/USD rallied to a high of 1.1381 on Friday however finished the day relatively unchanged around 1.13, as lacklustre data and continued fears around the medium-term impacts of US tariffs on Europe's economy have kept further ECB cuts on the table. We see major support for EUR/USD at 1.1200. -KB

NZD – NZD/USD remains in consolidation mode, in a 0.5900-0.6000 range, which could persist during the week ahead. We would attach a slight upward bias to our near-term outlook.

Global risk sentiment has risen over the past two weeks, as some de-escalation in the US trade wars has been evident. Most recently, on Friday, China’s Commerce Ministry expressed conditional willingness to negotiate with the US. Further conciliatory gestures would lift sentiment further, and in turn, currencies such as the NZD. That said, it’s too early to conclude the eventual shape of the global trade landscape, and it’s likely that more surprises are in store – in both directions.

There’s a major NZ event this week - the Q1 labour data on Wednesday, which we estimate will show unemployment rising to 5.3%, but only slightly above the RBNZ’s 5.2% forecast. In the US, the Fed will likely remain sidelined amid tariff uncertainty, but there will be Chair Powell’s press conference to watch – it often elicits a market reaction.

The AUD/NZD cross rose to 1.0847 last week, and has potential to extend the rise to the 1.0900 this week. Further positive news on US-China tariff negotiations would enable this (AUD is more sensitive to China developments than NZD). Datawise, there’s little major from Australia, so that any surprise from the NZ jobs data could be significant for the cross.- IS

Rates

US Rates - This week’s FOMC decision, though unlikely to see a policy shift, will still be heavily scrutinised through the lens of Trump’s reaction and ongoing animosity towards Jerome Powell. While the market is calmer around the prospects of diminished Fed independence, there is some risk that renewed uncertainty negatively impacts USTs. Either way, we would not expect much of a shift in current Fed terminal rate expectations. While there has been some paring back from the worse case growth scenario, we expect the market will react more to data outcomes that feed into the fear of a trade war related growth slowdown.

Outright: The market is currently factoring a Fed Funds target range of around 3.25% by early 2026. Comparing that level to the 10yr yield was behind our recommendation last week that the rally would slow as the spread moved below 100bps. That is what occurred and it is now back to around 102bps. We suspect that relationship will stay in place for now as the market grapples with the potential for stagflation and the Fed response to it. Despite this and other uncertainties around USTs status within the global market framework, our sense is that the established medium term range for US 10yr yields is likely to remain in place (4.00- 4.75%).

Curve: We expect the curve to consolidate around current levels. Further near term flattening would be related to a paring back of Fed expectations, however that would be in the form of a “tweak” to the current outlook, rather than represent a major curve trend reversal. Hence, from current levels we would fade any material flattening, with a view that the 2-10yr curve will eventually move back toward the 65-75bp range.

10yr Spread to Bund: The US-DE 10yr spread is 20bp below its recent peak. We will wait for the current outright volatility to settle down before re-assessing where to from here, however our previous confidence that this is setting up for a narrowing opportunity is now seriously diminished by the ongoing debate about whether the US has lost its exorbitant privilege. – DM

AU Rates – The landslide ALP victory in the Federal Election, restoring the incumbent government with an increased majority, is a major medium term focus for markets. The main questions are whether the strong mandate is a positive or negative for bond issuance. The variables include whether the Government will be emboldened to spend more over the cycle, weakening the fiscal position, or whether they will maintain discipline on the fiscal side of things. Last week’s S&P warning around the sovereign AAA rating will be a reminder that growing net debt and general government deficits will be heavily scrutinised.

For now, we do not expect a major re-evaluation of the current fiscal stance. The main election promises are $10bn for housing and $8.5bn Medicare, both over 4-5 years and offset by $6.4bn in "efficiency gains" over the same period. However that is just the explicit “face value” estimates and don't take into account other indirect implications of the policies. For example will more housing stimulate growth to offset a potential global downturn? And does certainty in Australia’s political and institutional framework support domestic and global investment? How inflationary or otherwise are the policy outcomes and what will be the RBA response? Overall, from a market perspective, the main narrative still talks to the theme of strong issuance levels continuing.

Outright: Last week’s calmer conditions are expected to continue this week, although with few significant domestic risk events, offshore price action, sentiment and momentum will loom large. 3yr futures now nearing the bottom of the 96.60 – 96.80 range we have been discussing and the question is whether it will push below that lower bound. That would depend on whether there is a major revision to current RBA pricing, however despite CPI last week, there was very little change in the terminal rate and we would expect the current expectation of 4 to 5 rate cuts to remain in place for now. We would be better buyers on dips but would not assign much risk to outright positions. 10yr futures are in a similar situation, pushing toward the bottom of the recent 95.70-95.90 range.

Curve: The curve flattening of the past fortnight has slowed somewhat. The main driver of a further flattener will be a revised RBA policy track, while a renewed steepener would be driven by bearish global price action. We suspect the latter is a more medium term influence, although any ongoing de-escalation of the tariff war will bias the curve flattener or at least consolidate current levels. We continue to expect the AU curve to flatten on a relative basis versus the US.

Swap Spreads: The Federal election outcome does not dramatically shift the key supply narrative underpinning EFPs. In fact it adds to it marginally. So, we expect that 10yr EFPs will have another look at -15bps in coming days. That is in line with our well held view that spreads on average will tend toward the narrower end of the range, but I suspect it will need a shock increase in deficit spending for another material impulse narrower to occur.

Semi Spreads: One of the main policy promises of the election campaign was the $10 billion over 5 years to build 100,000 homes for first-home buyers as part of its Homes for Australia Plan. The latter includes partnering with state governments and it will be interesting to see how this evolves from a funding perspective. Does it mean more tied grants from the Commonwealth to the States, which would be semi positive. Or could it mean a heavier burden on state finances, which would be a clear negative. The other consideration is whether there is a material political element that favours those with Labor state govenrments. We would downplay the latter, but the market will probably take a cautious approach .

These questions will, of course, take time to resolve. Near term, the main considerations are whether the new month brings greater semi supply. We think it will, especially as May is a substantial coupon month and the fact that spreads have hung in pretty well is also significant. In the background in the 10yr EUR QTC deal as well. Our sense is that semis will likely underperform on a swap basis, but that the spread to bond is still sufficiently attractive to attract those seeking yield.

10yr Spread to UST: AU bonds have given up some of their recent outperformance as USTs rallied. While that is a normal spread performance, we continue to note that AU bonds have had a good performance during the global ructions of recent weeks. That is just another manifestation of the shifting world order, with USTs not representing the same risk characteristics as in the past, while AU is transforming into a safer net saver nation. -DM

NZ Rates – The NZ 2yr swap rate has hovered above tentative support at 3.03% during the past few weeks, continuing to follow US and AU rates. Local fundamental drivers haven’t added much to the mix, NZ economic data momentum largely matching expectations.

OIS pricing has stabilised during the past few weeks, stuck on three more 25bp cuts in this cycle (while ruling out any chance of a larger 50bp cut in this cycle). Westpac continues to forecast only one more 25bp cut, while the RBNZ’s OCR forecast from the February MPS implies two more.

The NZ yield curve, which in April steepened significantly as US long-maturity yields jumped on fears US treasury bonds would lose their safe-haven identity, has calmed and flattened by around 15bp. Further slight flattening is possible during the next few weeks if the US backdrop becomes less risk-averse, but major flattening – led by expectations of the next RBNZ tightening cycle – is now a year-end story at the earliest.

NZGB i-spreads have fallen slightly over the past week, the 2035 currently at 48bp (vs 51bp last week and December’s record high of 65bp). There’s downside potential during the weeks ahead, helped by NZDM’s reduction of weekly tender supply for May ($500m to $450m, with possible continuation after May). Markets are eagerly awaiting the annual Budget and updated NZGB issuance programme for the next four years. Early indications are that the programme should be little changed. We will finalise our thoughts on this after the government’s 9-month financial statements (to March) have been released on Thursday.

NZGBs have outperformed other countries over the past few weeks, most obviously vs USTs (10yr spread about 25bp below the April high), but even vs ACGBs (about 15bp lower). While the former could have some way to go, given the scarring effect of the Administration’s policies on USTs, we would be inclined to eventually fade the move against ACGBs given these could be a beneficiary of UST aversion.– IS

Funding, basis, and liability management.

Australian markets saw duration added last week as supply came to market. Yields are opening higher on Monday, following the move in US markets into the weekend. The decisive win in the Federal election on the weekend is unlikely to impact markets in a significant way for now.

The global backdrop remains tricky. Equities in the US have been up for nine consecutive sessions, but it doesn’t feel like an optimistic bounce, as the corporate reporting season is a rear-view mirror. The news flow around product shortages is becoming a daily issue, albeit one where it is anticipatory rather than actual. For now at least.

The details of forward guidance, with the impost of tariffs is a warning, particularly on the price side. The global backdrop is for a weaker 2025, but the inflation story is vexing- empty shelves and tariff rises for the USA set against a dumping of product into other markets and the possible disinflationary effect elsewhere.

Australian CPI last week was a positive for the ongoing retreat of inflation, but details don’t appear on the whole to be a perfect line up.

Funding markets are stable in Australia and offshore. BBSW/SOFR has stayed relatively high on the front break- our working theory remains that it is the reversal of hedges from both super funds, as well as leveraged money looking for carry.

As equities recover here, the need to unwind hedges will drop. But, a more structural thought would be to understand if the recent market crash, and USD weakness changes investment behaviour such that the offshore investment, particularly to the US market is curtailed.

If so, what would a new environment look like, would flows be redirected to other markets, and how would the FX hedging of these other markets manifest themselves.

Single currency basis markets, having made new peaks in mid-April have also retreated, and the curve has steepened in 6s/3s. 1-2 year tenors are 5-6bp lower, while 10s are 2bp lower in the retreat.

In the forwards market, we have been expecting the AUD FX/OIS basis to narrow, which has taken longer than usual, and in the 1-month tenor this took place, though it has edged higher today.

Term FX/OIS is a little lower. Forward implied yields have risen a touch in recent days, having set cycle lows last week. May is a coupon month for ACGBs so that injects a little more system cash, so we would expect a little more easing to play out in forwards. -MW

Commodities

Crude:

We have noted several times before that April/ May 2025 feels a bit like 2020. Back in March 2020, Saudi Arabia took the ill-fated decision to cut prices and announce a production increase. Given the emerging backdrop of the Covid pandemic, that supply war with Russia culminated in a collapse in crude prices into negative territory. This time around, the price war is being played out in a much less aggressive way. And to be fair the demand backdrop is not collapsing the same way as it was early 2020. However, it’s still a supply war, and we all know what happens in a supply war. At this rate, all 2.2mbpd will be returned to the market by October, which will likely be the point at which peak demand destruction will be seen from tariffs and trade wars. So, no surprise that Brent has traded below $59 this morning and is likely to remain below $60 unless we see actual signs that the likes of Kazakhstan and Iraq are set to reign in production.

And we just don’t see that happening. As we noted last week, the Tengiz expansion project is ramping up to full production by June and the CPC pipeline is set to fully re-open on May 20. Meanwhile Iraq has resumed discussions with Syria over the Kirkuk-Baniyas pipeline (which has a nameplate capacity of 300kbpd) while also signing a contract with Chinese partners in the Eastern Baghdad field to raise production by 100kbpd. And the Iraqi PM is set to visit Turkey this week to advance the joint Turkey, Iraq, UAE and Qatar ‘Development Road’ project with possible discussions over moves to restart the Ceyhan pipeline. So, while commitments may be given by Iraq and Kazakhstan, it’s very unlikely they will be adhered to. Hence further weakness below $60 in the belly of the curve looks likely, creating attractive opportunities for importers to hedge.

Metals:

The massive migration of copper from Asia to the US continues, supporting global prices. Copper inventory has plunged on the ShFE, while LME copper inventory dropped last week to a 10-month low last week, and LME cancelled warrants jumped by just over 20,000 on Friday driven by requests for metal in Taiwan. Comex copper inventory surged to the highest since November 2018 reflecting massive demand for copper stocks in the US ahead of expected section 232 tariffs later in the year. IHS high frequency shipping data reported 170kt of copper imports into the US in April, well above the previous record of 142kt reported by official US trade data in November 2001.

However, we remain of the view that LME copper is fundamentally unattractive close to $9,500. That’s because copper supply is rising, and we are heading into a surplus with end user demand being impacted by tariffs and trade wars. Hence, we don’t want to get involved in copper close to $9,500 and we expect to see a more meaningful correction once we know the tariff rate for US copper imports.

We tend to see aluminium as better supported on the basis that auto part importers will now be spared tariffs on steel and aluminium. Aluminium has heavily underperformed copper, so is well overdue some relief here.

Iron Ore:

We stick to the view that iron ore is well supported above $95 for now, but a drop below $90 and beyond is coming in the second half. The likes of Baosteel all but confirmed that Chinese steel production will be curtailed by 50mt this year versus last. With iron ore exports from Australia and Brazil normalising after the collapse in Feb due to extreme weather, iron ore port inventory is starting to rise in China and new supply out of Africa is also approaching. Simandou will see first iron ore production late this year while Sinosteel confirmed that first iron ore production from the Kribi-Lobe mine in Cameroon will be in March 2026. Thus, we remain of the view that iron ore prices will fall below $90 and beyond later this year.

Gold:

Gold saw its first back-to-back weekly losses for the year with signs of de-escalation on trade wars hitting demand. However, as we noted last week, we saw the strongest quarterly demand for gold in a first quarter back to 2016, with a significant proportion of this being ‘buy and hold’ central bank demand, thus we are expecting dips - RR

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