FX:

AUD- Although AUD held the right levels overnight, it has unwound some of the gains accumulated last week. However, the case for AUD upside remains strong as yield spreads continue to trade in Aussie's favour, and the March NPC agenda will be focused on rejuvenating domestic demand and stabilising property market woes which should provide baseline support for AUD.

A readjustment of US macro risks is causing some upheaval too, with a soft S&P services PMI Friday, on the heels of Walmart's negative guidance and soft Philly Fed details a day earlier, triggering a downdraft in US equities and risk-related currencies such as AUD.

A weaker JPY has also taken some from AUD's sails - BoJ/Ishiba did not seem overly concerned about JGB yields Thursday, and AUD rode JPY's coattails higher Thursday, but Ueda signalled a readiness to intervene to quell a surge in yields, upending JPY Friday.

But we don't think AUD needs to trade much lower than 0.6325-35 in the early part of the week. AU-US10yr spreads are at 2mth+ highs and the impression of US exceptionalism is looked a little tarnished - US stocks have underperformed Eurozone peers where fiscal hopes are boosting sentiment and tech is China sentiment higher. A good deal of fatigue has kicked in with repeated tariff threats, iron ore prices are cycling comfortably above $105/t. The arc of the hawkish RBA reappraisal story has further to run in ways that can boost AUD too. About -18bp for their May 2025 meeting is still priced - a heck of a lot of conviction to a meeting that is still 3mths away, and on a Board that is clearly wary/cautious/reluctant and of course assumes Q1 CPI 30 Apr is very benign. The RBA could well cut again in May, but the risk is that markets wind that pricing back first.

We are beginning to wonder whether a bigger unwinding of the Trump term premium may be in the offing. The GoP's 2025 budget is costed at a net $4trn addition to US deficit over the next 10years, an eye-watering number, but well less than the $7-8trn Trump budget plans costed during the election, in part due to $2trn in budget cuts, ICE deportations are are running well below promises too. Thus far only a 10% tariff on China and 25% on steel and aluminum have been erected, though admittedly there's still reciprocal tariffs coming post 1 April and they could be quite significant. - RF

NZD- NZD/USD’s pullback this week still leaves it with a glimmer of bullish potential near term as long as 0.5700 support holds. The main factor supporting the near-term bullish case is that speculative short positioning in NZD/USD remains extreme. In addition, in the wake of the RBNZ MPS last week, where it clearly signalled 25bp OCR cuts for April and May, and a third and final one sometime this year, NZ-US yield spreads have risen off multi-year lows. Multi-month, though, we remain bearish, targeting 0.5500 or lower. This is based on the expectation that the US dollar will eventually resume its October-January uptrend, supported by the US economic performance, a pause in the Fed’s easing cycle, and clarity on US import tariffs by April. - IS

Rates

US Rates- Positive sentiment has continued to underwrite bullish price action in USTs. Tariff-related risk aversion remains a constant backdrop, while the largest decline in consumer confident in three and a half years further spurred today’s UST rally, followed by a strong demand at the 5yr auction. While recent Fedspeak has talked to a “wait and see” approach, confirmed again by Barkin overnight, the market is gaining confidence that further rate cuts will be necessary, with Fed pricing now reflecting two 25bp rate cuts in 2025, with the next move at mid-year.

Outright: 10yr US yields have now moved to the lowest levels of 2025, extending the strong rally of recent weeks. The strength of the bullish impetus has surprised us, as valuations look far too expensive relative to Westpac’s forecast of a Fed on hold throughout 2025. However momentum remains strong and we should not ignore it. While we have been recommending a “buy on dips” approach to USTs, those dips have been few and far between and we find ourselves reassessing the expected 2-3 month range. For now we would be neutral at current levels, although the ongoing risk aversion encouraged by geo-political uncertainties and Trump’s erratic agenda will remain a dominant market thematic.

Curve: The curve has bull flattened as risk aversion has surged, despite the short end factoring in more rate cut risk. That talks to the strong fears for the economic health of the economy and as such we cannot rule out the flattening trend continuing near term. Even so, we would expect the 2-20yr curve to remain in positive territory.

10yr Spread to Bund: Trump’s exhortation to Europe to spend more on defence has gained pace over the past week and negatively impacted European bonds such that USTs have outperformed by around 20bps over the past week. That has seen the 10yr spread compress significantly. The German election outcome has seen a change in government, although the coalition that the new Chancellor Friedrich Merz puts together could be some time in the making. The associated uncertainties, along with the aforementioned pressures on budget spending are likely to see USTs continue to outperform, with 175bp the next target on the spread. - DM

AU Rates- Last week’s “hawkish cut” from the RBA will remain at the centre of market discussions this week, with the monthly CPI also a key focus. Current pricing suggests a 75-80% chance of a further cut at the May meeting and less than a further cut beyond that in 2025. Given that, and with the RBA messaging to the fore, the risk reward around the data is in our view skewed to the bear side, selling off more on an upside inflation surprise than vice versa. Even so, while there will always be tweaking and re-calibration of the near term outlook and the terminal rate beyond that as new information comes to light, we would not expect a major shift over coming months. So expect a greater than 50% chance of a May cut to remain the case through to the Q1 CPI release in April. We have written in our rates weekly that todays monthly CPI is unlikely to change valuations and see the risk reward around the data as skewed to a bigger selloff on the upside in data. January is historically seen to be a seasonally weak month and commonwealth government rebates extending into the first half of 2025 pose a risk of further reductions in electricity prices.

Outright: Market outcomes will clearly be very data dependent, however we would expect price action to proceed very similarly to that evident since the December Board meeting first noted the Bank was “gaining confidence” in the path of inflation. We would characterise that as a volatile range-trade. Within the range we expect, all else equal, to preference buying on dips and taking profits on rallies. The near term risk to that view is the expected market debate on the prospects for higher terminal rate than Westpac is currently forecasting (3.35%).

Curve: Prior to the cut we were of the view that the RBA related curve steepening had run its course and we are now even more of that view. Any further steepening is likely to be capped as global yield seeking behaviour will continue to have a significant influence on curve dynamics. For now, we await entry levels to re-stablish flatteners, either outright or on a spread basis. That would be around the 63-53bp level for the 3/10yr futures spread.

Swap Spreads: While the “hawkish cut” could encourage hedging flows, current valuations are not encouraging. So, we remain better receivers on moves to recent wide levels around 0bps. At the same time, we believe that we have seen the narrowest levels, at least for now. So expect EFPs to remain within recent relatively narrow ranges near term.

Semi Spreads: Despite Queensland being placed on negative ratings outlook, semis have continued to perform well as the sector continues to exhibit attractive relative value versus both domestic comparables (A$ SSA and corporates) and global market alternatives. That has seen the marginal investor happy to add to risk when yield is available and the beginning of the easing cycle will only add to positive investor sentiment, and so the “buy on dips” mentality will continue, despite semi-bond spreads being at their narrowest levels in a year or so. For this week, that fact and prospects for more supply, following on from the TCV syndication last week, makes us a bit more cautious. We have seen spreads move wider over the last two days but are still of the view that any widening in semi spreads will be quickly capped and countered.

10yr Spread to UST: The spread has exhibited volatility within a very narrow range, and one which we do not think will change anytime soon. We continue to recommend fading widening impulses and have targeted +5bp in the 10yr physical spread, which is where the spread currently is. However given the uncertainty around the RBA new risk on the trade is probably being kept to a minimum. Nonetheless, we would expect this current exploration of the spread wides to short-lived. There is a similar opportunity in the AU-US 5y5y swap spread as well. – DM & UC

NZ Rates- The NZ 2yr swap rate remains rangebound, 3.33%-3.65% over the past two months. Offshore rates effects and NZ data surprises aside, we see vulnerability to the upside during the weeks ahead for a couple of reasons. First, the remainder of the easing cycle is fully priced by markets. The RBNZ MPS last week clearly signalled three more OCR cuts this year and a terminal rate of 3.0%. That matched market pricing (25bp cuts in April, May and October), and is similar to Westpac’s forecast of 25bp cuts in April and May, ending at 3.25%. Second, the pipeline of mortgages due for refixing in H2 is large. Banks have lowered some of their term mortgage rates following the RBNZ MPS, and may incentivise a pickup in fixing, which we expect will target terms in the 18mth-3yr area.

The 2-10yr swap curve has been consolidating the past year’s gains during the past month - understandable given the RBNZ easing cycle appears to be fully priced. Any further steepening in this cycle is more likely to be long-end driven and come from US-led rates moves than from NZ. We are watching to opportunities to position for medium-term bear flattening.

NZGB i-spreads have tightened significantly over the past two months, the 2035 now at 40bp – lowest since November, and below the December’s record high of 65bp. Improved sentiment towards NZGBs has been evident in tender performance and the 2035 syndication. Supply concerns have not disappeared, but the latest government financials were, if anything, a touch better than forecast. In addition, US i-spreads have fallen this month, driven partly by expected favourable regulatory changes. Multi-month, we expect NZGB i-spreads to fall further, helped by the looming mortgage fixing wave, and led by the short end. Lower NZGB i-spreads will also cause lower LGFA i-spreads (LGFA yields have been linked to NZGB yields over the past nine months).

We continue to watch for entry levels into medium-term NZGB-ACGB wideners. The 10yr spread (5/35 vs 6/35) has been stuck in a +5bp to +25bp range over the past three months, with a hint of upward momentum. We have been waiting for a pullback to the +5bp area, but will also consider a widener upon a break higher.

NZDM announced this morning that it expected a syndicated tap of the NZGB 2032 bond to occur by 30 April, and that prefunding of the 2025/26 programme may occur. – IS

Funding, basis, and liability management.

Last week saw both the RBA and RBNZ cut rates as expected. The RBNZ has outlined a clear path for rate cuts, while the RBA’s comments at the presser, the Deputy Governor’s speech on Thursday and Friday’s HoR speech clearly conveyed a view that the market pricing for rate cuts is too great.

For liability managers, this clear message needs to be considered for a higher for longer narrative, one which has been expressed here many times. Yields in the 3-year tenor are little changed since Tuesday’s RBA cut and will need softer data to fall.

The jobs data also out last week gave nothing, so perhaps the turn of Jan CPI this week can give the market a move on.

The 1-year forward 3-year IRS has now shifted lower, sitting just under 3.8% a welcome drop, but still not enough in our view to strongly add hedges here. The BBSW rates have naturally set lower following the cuts, but the projection of where they get to suggests a flatter track.

Forward implied FX yields are not breaking below 4% and have increased this week as the RBA pushed back on market pricing for cuts. FX/OIS basis is little moved around 0bp for A$ 1-month tenors.

The cash that hit the market earlier this week (see previous notes) has been soaked up with Kangaroo issuers tapping bond markets again. Decent size Kangaroo deals which in the main have EFP/Xccy impacts) show demand for bonds, but this is spread product and not necessarily a directional view on yields. The inbound issuers are certainly helped by higher levels of Xccy basis, even if not swapping back (such as PSP) while the bid tone likely reflects the expectation of Semi issuance offshore. NAB issued EUTR1bn 7-years earlier this week, so basis is at the highest level for the last few months, before the expected SSA issuance that comes at the start of the year.

The 5y5y and similar tenor forward starting basis curves are looking stretched and attractive for carry players but have not as yet found a level where super funds or others have turned the market.

For Xccy basis market players, we published a primer on the conventions of the market last week. Please contact us or your Westpac coverage for a copy.

Lastly, rates vol in the top left is falling as the policy moves globally slow down. We looked at the structure of 6m2y/6m10y recently and as that vol curve has steepened, it is reflective of a more anchored front end. With outright levels now more settled at the ‘end of the Trump trade’, we’d expect vol to continue to edge lower.-MW

Commodities

Crude:

Crude prices fell overnight to YTD lows, with WTI falling 2.5% to $69/barrel, driven by pessimism around slumps in Chinese oil demand, weaker US consumer confidence and the revision down in global growth prospects from tariff threats. Additionally, BP has reached an agreement with Iraq in redeveloping the Kirkuk oil fields which aims to increase Iraq’s oil production. In the face of sanctions, Russia’s 4-week average oil shipments have fallen 3%, making delivery to China and India increasingly difficult. Goldman analysts reported overnight that a US tariff on oil could cost consumers around $22bn equivalent to a $170 levy on households, without stimulating domestic production as there is a difference between the light oil produced domestically by the US and the heavy oil US refiners require.

Metals:
US demand for Aluminium out of Canada remain strong with Canadian exporters showing no immediate plans to shift tons elsewhere until the tariff story is solidified. Furthermore, Rio Tinto’s CEO recently stated that in the likely scenario of a broad 25% tariff on aluminium and steel, diverting flows to other regions e.g. Europe wouldn’t make sense. Rio also stated that under a 25% tariff, it would probably only halt selling of the metal to US buyers if a regional premium goes below roughly 45 cents/ton. Chalmers also reported over night that he had a “very constructive” talk with Bessent on tariffs which may signal hope yet for Australia to be granted an exemption to the 25% tariff imposed.

Demand for copper has picked up in recent days, with requests to withdraw LME copper from warehouses rising from 32,550 tons to 84,400 tons - the highest level seen since 2021. An extreme power outage in Chile has cut off electricity to several major copper mines, and authorities have stated it may take longer to reconnect mining companies which could see disruptions ahead in copper supply. Furthermore, Trump’s latest executive order has called for an examination of copper tariffs and potential US overcapacity concerns, with most imports coming from Chile, Canada and Mexico respectively. First Quantum has also increased its efforts in negotiating the reopening of a $10 billion mine in Panama which was shut more than a year ago.

Gold:

Gold fell overnight by around 2.1%, trading around $60 away from Monday’s highs. Furthermore, Barrick reached a deal earlier this week in Mali to end the 2-year long dispute around its mining assets which should see gold mining operations resume in due course. Furthermore, the growing price differential between Comex and spot gold has sent many participants rushing to capture the premium, leading to a spike in inventory levels observed at Comex warehouses, with stock piles up by more than 20 million ounces since the US election. Finally, Equinox Gold Corp - Canada's second largest producer of gold - has agreed to acquire Calibre Mining Corp. which will grant access to additional production sites in the US and Nicaragua.- KB

Uma Choudhury

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