FX:

AUD – AUD still can't seem to establish a consistent toe-hold above 0.6300, even as the USD is challenged by data on Friday showing that declining consumer confidence is feeding through to the hard data. But as always risk appetite unwinds take precedence and so AUD/USD softened on most crosses. We pencil large ranges this week and wouldn't be surprised if AUD/USD tested 0.6200-0.6400, in a week that contains the RBA, China PMIs, 2 April Liberation Day tariffs, March payrolls and Powell. Our bias is to fade AUD/USD downside.

Tariffs have mostly been an intraday volatility event for AUD in recent weeks. 2 April, and any potential new China tariffs, will however of course be more decisive, though we expect much the same. All the indications are that the focus is on the "dirty 15" and the Administration will go with a narrower approach that simply equalises tariff rates. That is priced in and could trigger a relief rally for AUD. A broader approach that takes into account non tariff barriers and VATs always faced implementation challenges given the enormity of the task. In the event that 2 April tariffs are more wide-ranging than expected, we suspect any AUD reversal to be a re-run of declines seen around tariff deadlines in early Feb and March - an upset within a low-key, wide-channelled mild uptrend in place since the start of the year, rather than a trigger for sustained downside.

We are learning that trade war 2.0 is having very different FX impacts than Trump trade war 1.0 too. Tariff policy reversals (alongside DOGE) are creating a larger policy uncertainty shock for the US than the rest of the world, and in focusing on industries and products that are not easily or quickly substitutable, i.e. European luxury autos, exchange rates do not "need" to adjust as much.

We still feel medium term that AUD likely gravitates towards the 0.65-0.66 area. The USD is ultimately still battling a bigger adverse medium-term sentiment shift under an Administration that is not prioritising pro-growth policies. China's policy makers continue to sound more determined too and their efforts to underwrite the economy look increasingly systematic. AUD/USD remains cheap to yield spreads too and we assume Gov Bullock reiterates that pricing for rate cuts is excessive (the Board meets 1 April). As long as AUD holds 0.6250 holds AUD remains in a mild uptrend.-RF

FX Majors- Compressed G10 ranges the last week likely give way to much bigger moves in the week ahead given the scale of event risk, most notably Liberation Day tariffs 2 April, March payrolls and Powell comments Friday. We don't anticipate sustained DXY upside developing, even if 2 April tariffs are more far reaching. We are learning that trade war 2.0 is having very different FX impacts than Trump trade war 1.0. Tariff policy reversals (alongside DOGE) are creating a larger policy uncertainty shock for the US than the rest of the world, and in focusing on industries and products that are not easily or quickly substitutable, i.e. European luxury autos & semiconductors, exchange rates do not "need" to adjust as much. Payrolls contain two-way risks - federal job cuts vs post stormy weather induced rebound potential. We anticipate DXY will eventually settle below its recent 103.25 lows, nearer 100-102, likely led by USD/JPY amid likely softening hard data trends and risk averse conditions, but in time a more even broader USD sell off should unfold.

The speed and scale of the re-pricing in EUR-crosses has been exceptional and the recent consolidation/profit taking is very understandable now that the initial “euphoria” around the bullish re-rating of Europe's fiscal trajectory has been digested. EUR/USD is more exposed than say GBP or AUD under narrow reciprocal tariffs but the threat or retaliation, and the fiscal supports being put in place should limit downside. In time EUR should reset to a 1.10-1.12 range, if not higher, but first it needs to navigate tariff risks 2 April.

Steadier US yields lately have complicated USD/JPY's path lower, but the case for a clean USD/JPY bear trend remains in place. BoJ officials are understandably unnerved by trade disruption risks, but at the same time officials will be mindful that another strong Shunto trade union pay negotiation round will keep more virtuous wage/inflation & income/spending dynamics intact. Ueda's recent comments haven't landed hawk-ishly, but the risks of a 1 May BoJ hike are higher than the market assumes (6bp priced), especially if 2 April tariffs are on the narrower side

NZD – NZD FX Strategy Comments:

NZD/USD remains inside a choppy multi-month range, torn between the highly uncertain global outlook (tariffs) and supportive local factors. There’s minor support at around 0.5710, and more important support at 0.5675, which if broken, would signal a move to the bottom of the three-month range at 0.5600. Partly offsetting the global negatives are NZ economic data momentum, extreme short speculative NZD/USD positioning, and an arguably fully priced RBNZ easing cycle. -IS

Rates

US Rates - After bear steepening through most of the week, USTs rallied strongly on Friday, with the curve bull flattening in response to the PCE data and after a positive European lead. The net result was 10yr yields falling 2bp across the week, while trading a 16bp range. That price action reflects the difficulties in establishing a confident view given the difficulties in assessing the near or medium term economic outlook. Whether or not the April 2 “Liberation Day” announcement provides a better platform to assess forward conditions and more settled conditions will be a key focus on the week, but scepticism is high.

Outright: The longer-term consequences of the trade war remain bullish for bonds, although the question is whether they are largely factored-in and given the almost 3 rate cuts in the forward cash profile. We certainly expect an announcement affect but still question the chances or 10yr yields to undergo a material or sustained trend in either direction. We remain neutral at current levels but would be tactical buyers on “dips” toward 4.5%. Relatively volatile conditions should continue, mirroring recent price action.

Curve: We have been suggesting that, with the post-FOMC front end re-calibration likely to persist, shorter maturities will be more anchored and hence the curve will be long-end directional, flattening on rallies and vice versa. That was certainly the case during Friday’s large outright moves and should persist this week. While at some stage, the market narrative will shift more to toward stagflation fears, that will be some time away.

10yr Spread to Bund: With the sea-change in European issuance prospects having been largely digested, the rapid re-pricing in the US-DE 10yr spread has paused and reversed slightly. While we continue to expect the recent spread narrowing to extend itself in coming months, there is limited US outperformance likely near term and we expect the spread to consolidated around the 150bp level over coming weeks. - DM

AU Rates - The first meeting of the RBA’s new Monetary Policy Board (MPB) this week is not expected to surprise markets, while the speech by Assistant Governor Kent on Wednesday is likely to be more technical in nature. The market will also have to digest the retail sales, dwelling approvals, and household spending data as well as the ongoing announcements from the Federal election campaign. Despite all of these risk events, however, we would not expect a material shift in the market narrative, with the current RBA risk reward profile being maintained. That is, the market will continue to ascribe around a 75- 80% chance of another cut being delivered at the May meeting and more than one further cut beyond that in 2025.

Outright: We expect price action to remain volatile but maintain a preference to buy on dips and take profits on rallies. We have been calling a 3yr futures 1 month range of 96.05 to 96.30 and for 10yr futures to remain within the 95.40 to 95.70 range of the past months. The 3yrs are now back toward the upper end of the range, having twice failed to breach it in the past fortnight as the market is reticent to factor in much more near term RBA cut risks. A push higher is likely to be offshore led. While 10yrs remain in the middle of their expected range.

Curve: The curve has moved to its steepest level this year and the question is whether it will begin to attract attention from yield seekers. Given the global geo-political backdrop, along with ongoing supply fears domestically, which will gain greater focus with the post-budget AOFM issuance announcement, the curve will stay steep to reflect the risks. We await entry levels to re-stablish flatteners, either outright or on a spread basis, but now is not the time.

Swap Spreads: Given the 50% increase in gross ACGB issuance over the next year, there is little reason to expect the supply narrative that has pushed spreads to new inverse levels to change. 10yr EFPs briefly traded to our through -15bp target last week. We expect it to consolidate around these levels before pushing lower once the extra supply hits the market.

Semi Spreads: Media headlines regarding high profile infrastructure projects in Victoria (SRL East, airport rail) and Queensland (Olympic stadium) continue to focus on potential cost blow-outs and negative budget impacts. That remains a negative for the sector as a whole given the broader thematic of large debt-fuelled infrastructure pipelines. But these concerns are well-known and hence clearly reflected in the current pricing. We expect semi-bond spreads to remain relatively rangebound, but for demand to remain high on any widening. Ongoing supply at range lows will provide the test of that contention.

10yr Spread to UST: We continue to recommend fading these widening impulses at opportunity but we are cautious about adding much risk in the current environment. Geo-political risks and unresolved tariff uncertainties are not conducive to the low-volatility, risk-on environment that would support AU outperformance. We suspect AU bonds will have to look extremely cheap before new risk is added in size. That suggests a push above the 20-25bp level would be a necessary precursor to demand. -DM

NZ Rates –The NZ 2yr swap rate at 3.40% remains rangebound, inside a month-range of 3.37%-3.52% and a larger three-month range of 3.33%-3.65%. Near term risks are slightly tilted to the downside, given global growth concerns are rising. Multi-month, though, we expect a break higher, given the easing cycle is fully priced for 25bp cuts in April and May, with a final one by August, matching the RBNZ’s guidance. The NZ data pulse over the past few months has supported a cyclical bottoming of swap rates, and there remains upside potential from the large pipeline of mortgage resets.

The next major NZ event will be the RBNZ OCR decision on 9 April – a minor review with only a media statement and minutes released. While a 25bp cut is widely expected (because the RBNZ explicitly signalled it), Governor Orr’s recent resignation means the text will be scrutinised closely for any subtle shift in bias regarding a May cut.

The 2-10yr swap curve at 74bp remains slightly below the four year high of 78bp (11 March), so far struggling to flatten much despite moderately hawkish NZ economic news. Speculative short-end receiving has been persistent, and global growth concerns are weighing on the front of the curve. We retain a flattener trade (entered 7 March at 73bp, targeting 30bp or lower, with a tight trailing stop at 80bp), the rationale being to pre-empt the next RBNZ tightening cycle, which we expect to start around mid-2026. The main risk to this trade is being too early, with offshore rates also influential.

NZGB i-spreads have ranged sideways over the past few weeks, the 2035 between 45bp and 50bp and moderately cheap vs modelled fair value. We would be buyers above 50bp. NZGB-supportive features include benchmark index lengthening (end-March), a spike in reinvestment cash in April, strong NZGBs tender performance this year, and a possible bottoming in the swap rate cycle.

A syndicated tap of the NZGB 2032 is expected early this week, given the lead time between panel naming (last Thursday) and launch has typically been 2 or 3 trading days. Volume guidance is $3bn-$4bn, which implies some prefunding of FY26.

We continue to watch for entry levels into medium-term NZGB-ACGB wideners, to pre-empt the next RBNZ tightening cycle. The 10yr spread (5/35 vs 6/35) is currently at +13bp, inside a three-month old range of +5bp to +25bp. We would enter a widener either on a pullback to the +5bp area or a break above +25b. -IS

Funding, basis, and liability management.

A sharp move lower in rates over the weekend as the new week starts is a move driven by growth and sentiment changes ahead of the tariff announcements this week. As we have seen with the administration so far, the decisions change frequently and this uncertainty is likely to play out in rates markets with both policy rate expectations as well as the term structure. The RBA meeting this week is expected to show no change, and we would still be looking for a push back on market pricing to be articulated, even if the measures of uncertainty have risen.

FX/OIS basis shifted lower across the term curve last week and had an extra A$4bn of maturing T-Notes on Friday to add cash into the market. The 3 and 6-month FX/OIS basis is a little lower as we start the week. Forward implied yields are below 4% as they have been this month, but only just, and they have not moved despite greater uncertainty. Tomorrow’s RBA meeting is still likely to imply a slow and shallow path for domestic policy moves but sits up against increasing uncertainty offshore.

In coming weeks, we have A$41bn ACGBs maturing in just under a month for impacts on cash. Last Thursday we looked at the seasonal pattern for FX/OIS basis and noted we expect it would cheapen into this week, which, as above, it has. BOB spreads edged a little higher earlier last week after a period of low levels but that moved faded into the weekend. If there is to be any widening of credit spreads from here, the low levels in BOB are worth a thought for hedgers. That said, for now there appear to be no seasonal shifts in BOB spreads as we hit the quarter end.

We are watching deposits to see if lower yield levels impact bank funding. 6s/3s basis has edged higher over March and for several tenors is at the highest levels since 2022. A reduction in ASW flow from Semi purchases could be part of this, lack of corporate payside, as well as Kangaroo flow. We will also be watching for moves in deposits to see if funding needs change.

The large drawdown in global equity markets this month (3.5% in A$ terms) takes pressure off the Australian super funds hedging requirements, as we look towards the end of the month. The AUD spot and crosses are relatively stable, so hedges based off returns (or over hedged portfolios) are more likely to be unwound. This probably means the 5y5y Xccy level, or indeed other parts of the curve don’t get the usual dynamic applied over the coming fortnight. This means less RHS FX flow into month end. -MW

Commodities

Crude:

Crude remains torn by further commentary from US President Trump suggesting he is “pissed off” at the Russian President and would consider secondary Tariffs on “all oil coming out of Russia” if a ceasefire with Ukraine can’t be reached. Trump suggested that a secondary tariff could be set at 25% to 50% meaning that “if you buy oil from Russia, you can’t do business in the United States”. Russia is the third largest global producer of crude and using President Trump’s latest and greatest tariff weapon to remove those barrels from global markets would have a huge impact even after G7 tariffs have curtailed flows.

The question for traders though is do you take him seriously or not? We will just have to watch how this unfolds but coming on top of secondary tariffs on Venezuela and rising pressure on Iran, then the potential for fresh highs into the $74/76 region are definitely there for Brent. However, with OPEC+ starting production increases this month and Bloomberg reporting a “flood of Venezuelan oil flows heading to China” with shipments set to hit 400kbpd this month, the highest since June 2023, we stick to the view that we want to use strength into that $74/76 region as an opportunity to sell into strength.

Metals:

As of Wednesday last week the active Comex copper contract was up 31%, outperforming even gold. However, while the correction since then is small at just over 3%, it is significant. That’s because the market is really beginning to question whether the impact of auto and reciprocal tariffs could be deeply negative for copper demand and more than offset the current rush to ship copper to the US.

And if the US Commerce Secretary is conducting the section copper 232 investigation on “Trump time” and that US tariffs on copper imports could be coming within ‘several weeks’ then it means that ships are racing against the clock to deliver copper into the US. Now, public comments on the 232 report needs to be submitted by tomorrow, and if you have pre-written much of the report, it could indeed be issued within weeks allowing President Trump to announce tariffs. So, it all adds to the idea that there is a lot more volatility coming for copper, though the risks of a deeper correction are rising in our view as we draw closer to ‘tariff day’ and the section 232 investigation outcome.

Meanwhile, aluminium is continuing its swan dive from $2,700 and looks like it could test $2,500. The March Mid-West premium has settled back from record highs with the all-in price for delivered aluminium into the US peaking at 23%. The term structure for that Premium is also downward sloping suggesting that the market does not think that aluminium supply is a strategic concern. Auto tariffs are not helping here, and Trump has said he just doesn’t care if auto prices rise. Hence a test of $2,500 looks likely.

Iron Ore:

Iron ore remains well supported above $100 helped by iron ore inventory dropping to a 1yr low and rebar inventory rolling over from much lower levels than usual in the cycle while other forms of steel are doing the same a little bit sooner than normal. That suggests steel product demand is holding up better than we would expect given the fundamentals and will probably be enough to support prices above $100 for a little bit longer.

However, rumours of notices being received to curtail steel production in China were reported by brokers last week, with a major steel producer in Shandong having reportedly received a notice to curtail as much as 1mt of production though no official confirmation has been published. That will leave the market well capped by the $105/110 region in our view and we still see a significant leg lower in iron ore prices as we progress through 2025. -RR

Westpac IQ

Morning Report

Around the Grounds

Federal Budget 2025-26: The impact by sector

Economics

Markets

Thought leadership

Browse topics