FX

AUD – AUD/USD finally breached the key 0.6890/6900 support area late last week, and while downside hasn't exactly accelerated it is trading heavy, consistent with risk assets broadly. Four weeks of conflict are forcing a harder reckoning it seems: de-escalation looks increasingly distant, and with each day AUD's front-loaded terms-of-trade boost fades while back-loaded global growth risk builds. We are getting lots of client questions about Australia's domestic reserves too - 38 days petrol, 32 diesel, 29 jet fuel - which sit at the very low end of peers. Whilst this situation persists rallies into 0.6950–0.7000 should be sold. RBA minutes and US ISM/payrolls this week are unlikely to leave more than a fleeting imprint.

Trump's negotiating window has been extended three times — 48hrs to 5 days to 8. Each extension lands flatter than the last. Iran's posture has been consistent throughout: dismissive, on its own terms, no sign of convergence. Markets are getting it — pricing duration, not resolution. A ground offensive would trigger a further risk-asset drawdown and tighter financial conditions. Getting a fix on the timing of when global growth channel tightens meaningfully for AUD is tricky. Asia of course has a high structural dependence on MidEast crude but re-routing of flows, substitution and inventory buffers push out the "x-date". Japan and Korea have >200 days, while China has about 115 days, though alternatives such as coal push that out much further.

The medium-term bullish case for AUD is entirely sidelined while this situation persists. Yield support puts fair value well above spot — our models place the multi-week equilibrium at 0.73–0.74. Structural AUD appetite stays on the shelf while disruption risks build. A deeper setback toward 0.66–0.67 would be a different story though: valuation at those levels should compel opportunistic demand from super funds looking to add AUD exposure.

Beyond the conflict horizon, the war is accelerating the USD's pre-existing structural impairment even as it plays clean safe haven for now. War-related fiscal spending is lifting US term premia; geopolitical fragmentation is reinforcing multipolarity. This is not a story for today, but long-horizon allocators will intensify USD diversification once conditions stabilise.

The acute pressure on super funds to lift hedge ratios has abated lately as AUD's risk channels have revived, but the structural case remains and on the other side of the conflict horizon they likely start rising again. System-wide ratios rose ~2ppts in Q4; we estimate a further 3–6ppts in Q1 just before the war began in late Feb, driven by deteriorating AUD-MSCI correlation, elevated realised AUD vol, and negative forward points now annualising to nearly 1% in favour of AUD longs. We project ratios rising 10ppts in aggregate to around 30-35% in time - implying ~A$100bn in net new AUD demand, a flow large enough to matter structurally. While there is no pressure to lift hedge ratios right now, the next several years will produce a mix of "Type-A" (classic risk-off AUD tail dependence behaviour) and "Type B" risk-off episodes - US-specific stress where USD no longer catches a safe-haven bid. As that dynamic persists, AUD's historically high tail-dependence on USD strength erodes and its downside convexity fades.-RF

NZD - NZD/USD 1 week outlook: bearish; 3 month outlook: neutral.

NZD/USD 1 week outlook: bearish; 3 month outlook: neutral/bearish.

The NZD remains under downward pressure amid continuation of the Iran war. For the week ahead, we target a test of 0.5710 minor support. For the quarter ahead, we shift to a neutral bias (from mildly bullish), the Iran war now a month old with no tangible evidence of de-escalation. Should nearby support at 0.5710 give way, we’d target the 0.5500-0.5600 area for the quarter ahead. The RBNZ is unlikely to adopt a hawkish bias while the fledgling NZ economic recovery is at risk. In an extremely adverse war-related scenario, the 0.5500 major support area could be breached, noting that has not happened since the GFC. This week’s economic events will remain of secondary importance to war developments, but the monthly ANZ business confidence survey will be worth watching for the impact on business sentiment and pricing intentions. -IS

Rates

US Rates – Another week of the Iran war has passed with no real sign of an end to the conflict but a growing realisation that the economic damage done will last longer than previously expected. Over the week, 2yr yields were higher by 6bps but the trading range was huge – 3.78-4.02%. 10yr yields were 8bp higher over the week, having traded a 4.3-4.48% range. At the front end, the risk of an inflation-driven Fed rate hike continues to be ascribed about 20-25% odds. So where to from here? Volatility within relatively large yield ranges is the order of the day as Trump’s increasingly less and less credible prognostications about ceasefires, ultimatums and other market-soothing suggestions are all too often reversed or contradicted, sometimes within a trading session.

Outright: Should the current trading environment continue, especially with ground troops potentially raising the stakes, there is little reason to expect the broader direction for interest rates to reverse. There may be periods of consolidation, as often occurs are such rapid shifts in market valuations, but we continue to assess medium term risk rewards as skewed toward higher yields. So, we remain better sellers into rallies and would maintain short duration.

We are also cognisant that, beyond the immediate risk rewards, the longer the current situation persists, the more the narrative will shift to fears around global growth. In our view, that would completely reverse current policy pricing, but it is too early to fade the recent moves. Indeed, even if the narrative were to change more quickly than we expect, fears of stagflation will, in any case, not be significantly supportive of longer maturities.

Curve: The curve flattening associated with Fed rate hike pricing is likely to slow. Should the re-pricing continue, there will be further flattening to come, however we think it is more likely that the curve calculus begins to shift. That is, the mixture of near term inflation risks and medium term growth concerns, along with the issuance implications of higher military spending, should manifest itself in a steeper curve over time.

10yr Spread to Bund: The spread remains within the broad 130-140bp range that has largely held since mid-February. We do not expect a major re-calibration of this key relativity. – DM

AU Rates – Ahead of the Easter long weekend, the market will focus largely on the Minutes of this month’s MPB, with particular interest in the 5-4 split decision and just how much of that was a “hawkish” dissent or otherwise. With near 3 hikes priced in by December it would probably be difficult to shift pricing further in the hike direction, especially after Christopher Kent’s speech last week was itself seen as relatively hawkish and potentially superseding the Minutes as an important market mover. So, there is little reason to expect sentiment to reverse meaningfully in coming days.

Outright: Yields across the term structure have broken out to their highest levels since 2011. Despite this major re-pricing, given the global risks, we will remain better sellers into strength for now. Even so, we are exploring the idea that a hawkish RBA will provide a headwind to any ongoing yield rises as each successive rate hike will see longer tenor yields capped and eventually even move lower. However, the projected hikes have not yet been delivered and the global inflation backdrop also prohibits us from a more bullish outlook. Our recent research has also cautioned us against pre-empting the end of hike-related bearish trends too early.

Curve: We have been recommending curve flattening exposure for some time, and, despite the recent shift, see little reason to alter our view. Perhaps there will be some paring back given how much is priced-in for the RBA, but aside from periodic re-calibrations of policy pricing, curve drivers still favour flattening impulses, in our view, if only on a relative basis to other markets. Any normalisation in risk conditions should see global investor demand comes back into focus and yield enhancement trades will support a relatively flatter curve over the long term.

Swap Spreads: Swap EFPs are largely outright directional at present. So higher yields are producing narrower spreads and vice versa. Beyond that, at the long end, more sustainable supportive flows for 10yr EFP compression will rely on drivers such as AU-US 5y5y narrowers and 5y5y outright attracting receive-side demand. However, those flows are not likely to become dominant any time soon. For now, we expect both benchmark EFP spreads to remain within recent ranges.

Semi Spreads: Semis have been exhibiting volatile price action as global credit concerns wax and wane but overall, there has been good signs that buying on dips will continue medium term. The outright yield is attractive and supported by the ongoing 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. One caution, however, would be that, if we are entering a significant “VAR” event, it could push some funded accounts to cut positions. In that case, short- and mid-curve semis are likely to be vulnerable. We are also cautious in that, should global market conditions improve there will likely be a rush of issuance from this sector.

10yr Spread to UST: We have been noting that we are watching price action very closely with a view to entering narrowers. The 10yr spread did indeed shift lower last week, although it gave up some gains into the weekend. Even so, it remains off its recent highs and given how much is already factored in for the RBA, and the fact that market pricing for both the RBA and Fed are now more synchronous, suggests that the recent peak may be the highs and we should begin to average in to some narrowing exposure. That is supported by the 15 year highs in yields. Of course the geopolitical backdrop will limit the amount of risk put to work, but some small exposure is recommended. - DM

NZ Rates - NZ 2yr swap 1 week outlook: higher; 3 months: neutral.

The NZ 2yr swap rate has surged by around 60bp in March, responding to overseas rates, the Iran war, and large-scale repositioning.

This has left short maturity NZ rates at elevated levels, well above where we would expect to see them based on our outlook for the RBNZ OCR. We expect an eventual retracement towards fundamentals-based levels, but the timing of this is highly uncertain, largely dependent on developments in the Iran war.

The OIS market currently prices a 95% chance of an OCR hike by July and three hikes in total by year end. However, there were tentative signs of repricing in the US rates markets on Friday, as growth concerns seemed to outweigh inflation concerns for the first time in a month. A more typical risk-aversion response (short date yields falling) could ripple into NZ rates eventually. We expect the RBNZ MPR on 8 April to deliver a dovish signal relative to market pricing.

Accordingly, we will consider entering a received July OIS trade on any bounce to 2.55% (currently 2.49%, last week’s high 2.69%). We see the chance of an OCR hike in either April or May as near zero, suggesting the risk-reward for this trade, assuming it’s held until maturity, is attractive (maximum loss 1bp, maximum gain 29bp, given zero chance of April or May hike). While entering at current levels also seems attractive, we are wary of last week’s market dysfunction repeating. – IS

Funding, basis and liability management.

Quarter end arrives tomorrow in what is also a shortened fortnight due to Easter. The war moves into its fifth week, despite initial discussions limiting it to a three to four week campaign. Funding markets have been static, with repo, FX/OIS and Xccy basis markets well within recent ranges and not displaying a scramble for USD at a time when markets usually seek protection.

Yields remain at the upper end of ranges as rate cut bets have been unwound and oil prices are high. For now, markets are focussing on an inflation shock and not the impact to growth. Liability managers who are hedged are now seeing yields at the highest end of the range since 2011, so in-the-money hedges are looking attractive to consider removing some protection, if the view that there are only 1-2 more rate hikes coming, and that the market has fully priced, or almost fully priced the expected policy path. But, should conditions require it, a hike past the previous cycle high can’t be ruled out and that would almost certainly take yields further. After that, the question becomes one of the period of time policy stays on hold. For now, as above, the momentum is higher on inflationary risks rather than downside in growth.

The yield curve is flattening, but is not inverting in the forwards, and for the liability managers, a situation where there is some relief to add hedges via the forwards will be the next item to watch. Hedges added here are not that much value given the current pricing. The longer that market rates stay high, however, means that hedges start to shorten and this leaves a little less protection. There are some small anomalies in the curve that might provide opportunities for more active market players to look to exploit.

BBSW has of course seen the rises that means the floating rate risk holders are seeing higher sets. The inversion of floating to fixed, which we highlighted actively in the first half of 2025 are a long way away, and even with a few more policy rate rises possibly flattening this curve, the fixed rate leg is at a much high level with a 4 in front rather than the 3 we saw last year.

In the Xccy basis market, a recent note 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. Recent deals saw 10 year Xccy basis slightly better paid in the last week or so, with Melbourne and Sydney airports issuing 10 year deals in EUR and US$ respectively, while Westpac went to the CHF market, albeit in smaller size. CBA and ANZ went offshore, but again, basis has not moved far.

Looking ahead, the AOFM’s large ACGB maturity on 21 April of A$39.6bn also has A$19.6bn, or 49.5% owned by the RBA. That will have a lower impact on markets, but still could attract issuers, including Kangaroo borrowers to tap the market, lowering Xccy basis and EFPs and pushing 6s/3s higher.

After stabilising, USD swap spreads continue to edge lower as bonds stay cheap and dealers hold a record amount of inventory. This is not helpful for Aust/NZ issuers tapping the USD market. While bonds remain brittle, even at the higher yield structure, spreads could keep coming in. -MW

Commodities

Crude:

Friday marked an important watershed for energy markets. Despite Trump’s best efforts to talk WTI back from the $95/100 level by moving his “period of Energy Plan destruction” by 10 days until Monday April 6, we ended the day with prices above that level and have opened above $102 on the May contract. Meanwhile, the May Brent contract has opened above $115, which we have only traded above in a couple of sessions since the US Iran war started.

The arrival of US troops in the region, Houthi rebels firing missiles into Israel, Iran hitting the Prince Sultan airbase in Saudi with 15 US military service injured and reports of AWACS being damaged and multiple reports of industrial sites and infrastructure being hit by rockets and damaged across the region, it’s very clear that the situation in the Gulf is deteriorating. Rubio essentially confirmed as much on Friday, stating that US military operations could go on for “four to six weeks” while Netanyahu ordered the Israeli military to widen its invasion of Lebanon.

Now the emergence of Houthi activity adds an additional layer of risk here. To date they have been silent. However, it appears that Israel’s push to extend the invasion of Lebanon is dragging them in, albeit reluctantly. Hopefully, this is more signal than the start of broader escalation. However, it adds to the risks around the Yanbu ramp up.

Now the flow of crude through the Strait has been improving slightly in recent days, with reports of $2m being paid to the “Tehran Toll Booth” per vessel for safe passage. For a VLCC that may carry say 1.9m to 2.2mb, that’s only $1 per barrel of additional insurance – a small price to pay for additional supply. Pakistan was reported to have an agreement with Iranian authorities allowing 20 Pakistani vessels to transit the Strait. That’s helping to ‘normalise’ some Gulf markers, with Dubai and Oman trading in the $120s, and perhaps giving a false sense of hope that we are in something of a new ‘wartime equilibrium’ with just enough flow to stave off a catastrophic rush higher in crude prices. However, the number of vessels crossing West East is in the low single digits rather than the circa 20 or so fuel/ LNG tankers that would be making the crossing each day (noting the UKMTO reported a total of 11 ‘vessel’ crossings on Sunday, down from 138 a day prior to the war).

Meanwhile Ukraine kept on its attacks on Russian energy infrastructure with the Ust-Luga port again damaged in fresh drone attacks. Loadings had been halted since Wednesday last week due to significant damage from drone attacks mid last week. Prior to the recent run of attacks, Primorsk and Ust-Luga handled about 45% of 1.7mbpd of Russia’s crude exports.

With crude and oil product flows through the Strait plunging from 20mbpd to a trickle, storage in the region all but full and something like 11mbpd of production shut in, the impact on global energy markets will continue rising. With energy infrastructure being increasingly impaired across the region, it will be many many many months before we even start approaching anything that looks like normality for energy markets. Hence, the risks that we start pushing above $120 this week are rising.

Metals:

For much of Q1, we had been arguing for the break lower in copper, so we were not surprised by the slump to $12,000. However, the circa 20% correction from the late Jan highs appears to be exactly what Chinese buyers needed to start stepping back into the market again, noting press articles suggesting the drop below 100,000 yuan a ton on ShFE has seen demand from copper tube and rod producers “surge”. That has seen ShFE copper inventory drop back sharply last week. In addition, the sharp rise in sulphur prices is causing problems for copper producers in Chile and the DRC. Circa 65% of refined copper produced in Chile uses the heap leaching → solvent extraction → electrowinning process (abbreviated to SX-EW). Hence, while demand destruction will cap near term, it feels like $11,500/ $12,000 is the lower end of the range for copper for now.

The round of attacks on smelters in the Gulf adds to our more upbeat view on aluminium prices. News of “significant damage” to EGA’s Al Taweelah site (circa 1.6mtpa in 2025) and as yet unknown damage to an Aluminium Bahrain smelter over the weekend means this is more than just a short term supply outage. Now, higher energy prices are seeing extrusion activity being wound back, hitting demand, hence the more two way price action last week. However, this just emphasises though that aluminium supply is increasingly constrained by energy availability across the value chain, from smelting to downstream fabrication. Hence, talk of several western carmakers having problems securing new aluminium supplies with many drawing on inventories. Bottom line, we have been arguing for a move above $3,400, so we are not surprised by the surge this morning.

Gold:

We tend to see gold well supported and a good buy in the $4,000 to $4,250 region. However, EM economies will be hit hard by fuel shortages and reports of EM CB gold-for-foreign-currency sales and swap transactions are rising, with Kazakhstan and Turkey noted sellers. Hence $5,000 caps for now.

Iron ore:

With TC Narelle passing and no reports of damage to key ports, iron ore looks capped above $110. Now, rising fuel and fright costs are supporting pricing, with estimates that Tubarao to Qingdao freight rates have added close to $3 to the delivered costs of iron ore in China. However, there have been ‘unverified information on social media’ pointing to CMRG striking a deal to resume purchases of certain BHP products. Hence, we see prices capped here and we fully expect to see lower prices in time.

Markets

AUD Rates Morning Chartpacks - 2 April 2026

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