FX

AUD - With markets now pricing in a trivial risk of a June Fed rate cut (-5bp) after US March CPI delivered a big and very consequential ouchy surprise, yield spreads will throttle AUD/USD and reopen the case for more downside. There's downside catch up room for AUD too, with DXY-weighted yield spreads suggesting DXY "should" be nearer 107, consistent with an AUD/USD nearer 0.6400. AUD will probably run into buyers around 0.6480 on its first attempt, but we suspect that level ultimately gives way to a test of recent 0.6443 lows. The Aus calendars are thin until March employment 18th Apr.

USD – The decidedly sharp rebounds from further tests of 104.00 area were triggered by a sound, but not that strong, beat of consensus in US March CPI. However, the nature of the move, accompanied by a marked repricing of US rates higher across the curve and notable at the shorter end. The US CPI data underscore the more robust growth persisting in the US and justify the markets growing view of a more prolonged period of Fed patience that contrasts with profiles in other FX Majors. This suggests that USD will make a more pronounced move higher with a potential target of 106.50 in the near term.

EUR – After another failed attempt to push towards 1.09, the sharp move lower underscores EUR’s vulnerability ahead of Thursday’s ECB meeting. Although it may be regarded as a policy placeholder, President Lagarde is likely to underscore their much-repeated potential for easing in June at their press conference and so keep EUR/USD under downside pressure. Rebounds in EUR/USD are likely to be limited and whist the path for 2024 ECB rate cut pricing outpaces the Fed expectations EUR/USD will be at risk of sliding towards the 1.0500 area.

JPY – The sharp US yield moves triggered by US CPI finally pushed USD/JPY through 152.00 and heighten the divergence in policy profiles between a more patient FOMC holding policy in restrictive territory an cautious BoJ maintaining highly accommodative policy. However, the pace of the move through 152.00 is likely to be of intense interest for Japanese authorities and heightens the potential for sharp intervention squeezes in JPY. However, any such JPY squeeze should provide potential to reset USD longs once positioning is deemed to be more appropriate. The push to multi year highs above 152.00 does open potential for medium term moves towards 155.00 or even 1990’s highs around 160.00 despite the risk of intervention.

CNH - The PBOC will be rethinking their plans for CNY stability in the wake of the big ouchy upside US March CPI surprise and higher fixings can be expected near term. China is admittedly showing green shoots, but until we see a comprehensive package to restructure property markets, address debt overhang and revive low confidence, China's rebound will remain unbalanced and fragile. CNH is challenged into the US Nov election too, re Trump's tariff and China decoupling proposals. USD/CNH a buy into the 7.2350 region.In the absence of domestic data, ACGBs extended moves in line with US treasuries, ending the session richer awaiting US CPI data and the FOMC minutes. The AU 10 year yield rose from 4.09% to 4.23%. September RBA pricing remains slightly firmer, with markets now pricing in a 60% chance of a cut by September and around 28bps of cuts priced in before year end. Given that pricing for the RBA has remained largely steady in response to domestic data releases, and pricing reflecting 1-2 cuts for some time, there was nothing in last week’s RBA Board Minutes to shift our view. In fact the reaffirmation of their neutral stance and their failure to debate a rate hike scenario should be seen as a positive step in the evolution toward an easing cycle. In a quiet week of domestic data, the market will look towards US PPI data which is predicted to be marginally firmer. RF & TR

AU Rates – In the absence of domestic data, ACGBs extended moves in line with US treasuries, ending the session richer awaiting US CPI data and the FOMC minutes. The AU 10 year yield rose from 4.09% to 4.23%. September RBA pricing remains slightly firmer, with markets now pricing in a 60% chance of a cut by September and around 28bps of cuts priced in before year end. Given that pricing for the RBA has remained largely steady in response to domestic data releases, and pricing reflecting 1-2 cuts for some time, there was nothing in last week’s RBA Board Minutes to shift our view. In fact the reaffirmation of their neutral stance and their failure to debate a rate hike scenario should be seen as a positive step in the evolution toward an easing cycle. In a quiet week of domestic data, the market will look towards US PPI data which is predicted to be marginally firmer.

We note that the AU-US 10 year spread has reached new lows and remains at the -30 range. 10yr swap EFP spreads are now at their narrowest levels since the policy-induced spread compression began to unwind in 2022. They are now back below 20bps and back into the range that persisted during the more “normal” period of 2017-2018, when the trading range was around -15bp to -25bp at the wides. The spread will be largely directional but given receive side demand at opportunity we would expect widening to be capped and the 3-10yr box to remain inverse.

Regarding ACGBs, the AOFM has released the Green Treasury Bonds Investor Presentation on the AOFM website. The deal will come between April and June and has a June 2034 maturity and a size of $7bn. A current coupon would be between 4% and 4.25%, slightly higher than the 3.75% May-34, the current ‘benchmark’. With it unlikely to be considered for bond basket inclusion (the market makes this determination), it can lose some lustre, but being a debut issue in this tenor, and the recent interest in 10 year labelled bonds, there will be considerable interest. – UC & MW

NZD - The abrupt reversal in NZD/USD overnight brings the downside back into focus, specifically the recent low at 0.5940. Should that level give way, we’d be targeting the 0.5800 area, where it bottomed in Oct/Nov last year. A bit of caution regarding this bearish view is warranted though, given next week’s Q1 NZ CPI data is likely to be on the firm side.

AUD/NZD has fallen around ½ a cent in the wake of yesterday’s RBNZ MPR, the repeated stance slightly disappointing to cross bulls. We remain short from 1.0945, targeting 1.0700. - IS

Rates

US Rates – A firmer than expected US CPI print (MoM 0.4% vs 04% est. YoY 3.5% vs 3.4% est) caused yields to surge across the curve with 10 year USTs reaching 4.56% from 4.35% and 2 year USTs holding above 4.98% from, 4.75%. Minutes from previous FOMC meeting saw little reaction in markets, however, reiterated the fact that almost all participants judged rates to have likely peaked in this cycle and saw it appropriate to cut this year. Markets reacted slightly to geopolitical tensions, with headlines surrounding missile strikes on Israel by Iran. CPI data weighted heavily on Fed pricing, with the chances of a June cut dropping to just 10% from an equal bet prior to the release. This pushed past the Fed dot median pricing for September as well. – UC & MW

The US 2-year/10-year part of the curve remains inverted at new lows post payrolls and labour market data out on Friday. As mentioned yesterday, where a lot of market expectations have already been built in to the CPI release, investors who had started to buy fixed income on the recent selloff experienced a brutal shock. Where to now? The fixed income market will be fragile and will take time to readjust, looking towards further fedspeak in upcoming weeks to assess a potential pushing back of rate cuts. There will, inevitably be cross market comparisons against which central banks can cut rates this year, and which could get the same inflationary pressures as the US. But, if there is a silver lining, we are now out of the old trading range. The market will now look towards US PPI which is predicted to be marginally firmer. – UC & MW

AU Rates – In the absence of domestic data, ACGBs extended moves in line with US treasuries, ending the session richer awaiting US CPI data and the FOMC minutes. The AU 10 year yield rose from 4.09% to 4.23%. September RBA pricing remains slightly firmer, with markets now pricing in a 60% chance of a cut by September and around 28bps of cuts priced in before year end. Given that pricing for the RBA has remained largely steady in response to domestic data releases, and pricing reflecting 1-2 cuts for some time, there was nothing in last week’s RBA Board Minutes to shift our view. In fact the reaffirmation of their neutral stance and their failure to debate a rate hike scenario should be seen as a positive step in the evolution toward an easing cycle. In a quiet week of domestic data, the market will look towards US PPI data which is predicted to be marginally firmer.

We note that the AU-US 10 year spread has reached new lows and remains at the -30 range. 10yr swap EFP spreads are now at their narrowest levels since the policy-induced spread compression began to unwind in 2022. They are now back below 20bps and back into the range that persisted during the more “normal” period of 2017-2018, when the trading range was around -15bp to -25bp at the wides. The spread will be largely directional but given receive side demand at opportunity we would expect widening to be capped and the 3-10yr box to remain inverse.

Regarding ACGBs, the AOFM has released the Green Treasury Bonds Investor Presentation on the AOFM website. The deal will come between April and June and has a June 2034 maturity and a size of $7bn. A current coupon would be between 4% and 4.25%, slightly higher than the 3.75% May-34, the current ‘benchmark’. With it unlikely to be considered for bond basket inclusion (the market makes this determination), it can lose some lustre, but being a debut issue in this tenor, and the recent interest in 10 year labelled bonds, there will be considerable interest.

NZ Rates - NZ swap rates were unmoved by yesterday’s RBNZ MPR. The unchanged stance was disappointing to widespread received positions, but not enough to warrant rebalancing. However, the US CPI data has caused NZ rates to follow with a beta of around 0.5, and could cause a further recalibration of NZ OIS pricing (reducing the August meeting from a 45% chance of a cut to closer to 30%). Markets will also be wary about NZ Q1 CPI data on 17 April (forecasts are 0.4%q/q RBNZ, 0.8% Westpac).

We entered a long NZGB 2035 vs paid swap trade yesterday. At +24bp, it is near the top of a multi-year range, coupon and 2024 maturity reinvestment in April and May will be supportive, benchmark durations will increase by 0.6 years, and the offshore share of this line will likely increase as it becomes seasoned. The main risk is the 2024/25 NZGB issuance programme announced at the 30 May Budget is larger than expected.– IS

Funding, basis and liability management

At the end of last week, we started to see the shift lower in A$ FX/OIS basis, as 1 and 3 month terms fell. As we noted recently, this was expected, but took a little longer than we thought. 3 month may have based however, around 0bp. BOB spreads narrowed over the week and we see this as a result of the fixed rate full allotment repo discussions presented by the RBA’s Chris Kent during the week. This change in monetary policy implementation from the RBA is enough to moderate and mitigate previous spikes in funding. Our view is that FX/OIS and BOB spreads will largely become more muted. This view appears to be filtering into market views with several banks now publishing the same views as us. While attractive as a view, the ability to execute BOB spread narrowers is much easier on paper than it is to do, particularly last week when we flagged the view post the Kent speech. While it could well be marked tighter and flatter from here, the risk on these trades is that tight BOB spreads incentivise issuers to come back to the market.

Xccy basis continues to edge lower, benefiting the carry trade holders or those seeking to issue offshore out of the A$ market. There has been little of this since the burst we saw in early March, as several names took to the EUR and GBP markets. Kangaroo issuers (SSAs have not used maturities to issue in A$, favouring EUR, CAD and USD issuance this week).

Single currency basis has been quite stable, and we see the curve quite inverted, with 5s, where Kangaroo deals have been active, trading around 15bp, and the 12s, where Semis/ASW flow has been more prevalent, sitting at 9.25bp. The spot 6s/3s is also edging higher, at 19bp, and is set to move wider as rate cut expectations are pushed further out.

Even with the removal of some easing in the BBSW curve, the term curve has fared worse, and that has shifted the floating to fixed curve higher. It remains negative of course, making it a positive carry hedge (at mid-market levels), but has moved around 20bp from the lows seen in February. The 3 year swap rate continues to push towards 4%, a level that seems to have a gravitational pull, as markets seem reluctant to build too much in either side. The markety reaction to the CPI was out of line with our hinking. We had suggested that so much had already been factored in to markets after the red hot payrolls data and the broader moves in rates. But the pushing higher of yields suggests the market positioning was still quite long and needed a higher clearing yield.

We had been seeing lower vol in the interst rate markets, but with CPI coming in hotter, corporates will need to reassess a view of rate cuts and be prepared for a higher for longer scenario. Recently, top left vols had started to rise as the front end was more in play, but in thelast few weeks the vol curve shape has steepened again, reflecting the longer end moves. -MW

Commodities

Crude:

The US appears to have upgraded risks of an Iranian missile strike on Israel in retaliation for the attack on the Damascus consulate from “inevitable” to “imminent”. In addition, various press reported that the political leader of Hamas said that three of his sons were killed in an Israeli air strike in Gaza. Further, given domestic Israeli politics, it’s very hard to see an imminent peace deal in the Israeli/ Hamas war. On top of the above, the recent wave of Ukrainian drone strikes on Russian refinery capacity significantly added to the amount that could be taken offline because of the “kinetic energy wars” between the two sides. The recent OPEC+ meeting saw Iraq and Kazakhstan “pledge to achieve full conformity as well as compensate for overproduction”. And finally, Reuters has confirmed that Mexico will cut as much as 330kb of crude exports in May “leaving customers in the United States, Europe and Asia with a third less supply”. So, the geopolitical backdrop remains precarious, and more barrels will be removed in Q2. Hence our point that It’s hard not to see fresh highs for crude in coming weeks and $95 is certainly possible, though that would be the upper end of our expectations. That’s because markets have become overbought, so it’s very reasonable to expect price action to become more two way above $90 for Brent. Further, the EIA April Short Term Energy outlook sharply upward revised the supply forecast for global crude production forecasts for 2024 and 2025. So, as we move through these geopolitical risks into H2, we do see $90/$95 being the upper end of the range.

Metals:

No change on our cautious stance on metals given the stronger than expected CPI and push higher in the US$. Copper slipping back below $9,400 helps, though tin again screamed higher, and is up 16.5% so far this month. We completely understand why the market has turned bullish on metals given mine disruption, rising energy transition/ AI demand and likely central bank rate cuts later this year. However, the spread between spot and the 3m LME copper contract continues falling to fresh 3-decade lows is down 42% so far this year pointing to low physical demand. At the same time, global copper inventories are approaching the highest level in 4 years while at SHFE exchanges are 1std above average levels for this time of year. Meanwhile SMM reports that Chinese refined copper production rose 5.2% in March from Feb suggesting we have yet to see any signs of lower smelter production. So, we tend to see the ‘copper deficit bull case’ as one that emerges later in 2024 and into 2025 and thus, we don’t expect a sharp break higher in metals right now.

Iron ore:
Shares and bonds of China Vanke extended declines in afternoon trade on news that a regional manager was assisting an investigation, adding to the sense that the news out of the property sector remains dire. However, the rest of the economy looks like it is beginning to turn something of a corner here and we are starting to see upgrades to China growth with Goldman raising its forecast for China’s Q1 growth to an annualised pace of 7.5% with data set to be released next week. Goldman sees growth through the year at 5% versus 4.8% previously, helped by a rebound in manufacturing. By the middle of the month, we will have a complete set of Chinese data with March trade data this Friday, then IP, retail sales and Q1 GDP next week. We tend to see an extended period of consolidation between $90 and $110 before another leg lower to take us below $90 in Q4. RR

Robert Rennie

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