FX

AUD – Earlier reports of a potential 2nd US-Iran meeting and that a deal is still attainable continue to translate into AUD upside (high 0.7148 overnight). This is the upper boundary of our expected 0.7000-0.7150 2wk ceasefire range, and from here bullish momentum could dissipate into a more two-way picture. We are still a very long way from coalescing around a base case and core issues remain unresolved, meaning AUD upside has been entirely about compressing the probability of an escalation cycle - a big difference from completely removing it. There is a notable disconnect between risk assets (AUD, equity & credit indices) fully recouping war-related declines, while physical crude & rates show more permanent repricing/damage. Q1 updates from QAN & WBC y/day were not ideal either, not to mention big falls in consumer and business confidence - cautionary tales for AUD-crosses. To be fair, while a 2nd round of talks are on the table a higher short term floor is probably in place, around 0.7095. But if they are cancelled AUD could easily pullback to nearer 0.7000.

We have no edge in forecasting the war's eventual outcome, but there are range of plausible scenarios for AUD/USD over 3 distinct forecasting horizons, a framework of sorts:

1-2wk outlook: respect the rally, note the ceiling,

Any wobbles that set AUD back to around 0.7000 remain the ideal location for fresh longs, but we wouldn’t overstay it. We've only temporarily compressed the escalation cycle and worst case scenarios. Markets are still a long way from being able to coalesce around a base case. Core issues are unresolved, and uncertainty persists about what’s next. This means AUD will have to continue to price the width of a still wide distribution of outcomes and headlines, albeit with comfort that the worst case risks have moderated for now. We suspect there is a ceiling around 0.7150. Levels above that require confirmation we do not have - that the Strait is genuinely and fully open and that the 2wk window produces a durable agreement, rather than another round of brinkmanship. We assume the recent 0.6833 lows continue to hold, even in the event that hostilities resume - AUD longs are a fraction of pre-war levels, and the toll is mounting in US data as well - Michigan sentiment hit record lows, the Atlanta Fed Q1 nowcast is down to 1.3% and March US CPI showed inflation contained outside energy. Fed officials don't have to sound as hawkish as their counterparts at this week's Spring IMF meetings.

3-12wk outlook: range-bound, damage assessment:

This window sees sounder assessments of actual damage to Asian growth, supply chains, corporate earnings and household demand - the lasting downstream impacts. We should have a clearer picture of how much traffic in the Strait can recoup a respectable fraction of pre-war levels: we pencil in a wider 0.68-0.72 range this window, to allow for a wider range of outcomes. The prospect of an immediate full return to pre-war shipping activity through the Strait is not a given in this window (scarring and long-term energy production capacity damage). AUD’s behaviour in the weeks/months following April 2025 Liberation Day could be instructive. After the immediate impulsive rebound, sustained and consistent upside was fleeting. It was more of a slow grind in contained ranges.

12wks and beyond: AUD structural bullishness heavily reinforced:

The picture on this horizon is clear. While the USD has behaved as the cleanest safe-haven (primarily on liquidity grounds) these events unambiguously fast track the USD’s structural impairment. The erratic behaviuor of the Administration and a poorly planned and questionably executed war erode long term USD confidence. The petrodollar architecture has been stressed as well. Gulf sovereign wealth flows face pressure from reconstruction financing and discussion around CNY- and EUR-denominated oil pricing. Large current account surplus regions (Europe, GCC & Asia) face a multi-year increase in defence spending and domestic energy investment - less recycling into US assets and a positive demand impulse for commodities. These big "de-dollarisation" topics are not pressing right now, and they require a low‐volatility backdrop to unfold, but they all clearly point one-way: long-horizon investors will be accelerating USD diversification on the other side of the conflict.

This 12wk+ picture a rudely bullish one for AUD: Australia sits on the right side of an energy terms of trade shift in a world that has just been reminded of the cost of energy insecurity. Super fund FX hedging resumes on the other side of the conflict horizon with more structural force than before. The approximately AUD100bn in net new AUD demand from super fund hedge ratio “normalisation” has been deferred, not cancelled - but it will be "released" against a backdrop of structural USD weakness. 0.75 is still plausible in 2026H2. The main risk to our view would be a notable cooling in domestic growth and the labour market, upending yield support for the ccy.- RF

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

NZD/USD retains upward short-term momentum, currently testing 0.5900 area resistance. Above this, 0.5950 was pivotal in February and March, while the 0.6000 area has often capped rallies over the past year. War headlines have been risk-supportive since Monday, and will remain the main driver, but local developments have also been in that direction. The RBNZ MPR had a more hawkish tone than was expected, increasing the chances of near term rate hikes according to swap market pricing. Local events worth watching this week include partial NZ CPI data and retail sales data for March, released on Friday. Fonterra’s $3.9bn cash disbursement to farmers from the sale of a business unit is not fresh news (it was approved in October), but there will be interest in how Tuesday’s payments are spent or saved. For the quarter ahead, we retain a neutral bias pending some resolution of the Iran war. An escalation could cause a break below 0.5700, towards 0.5500, while a resolution could ignite a rally beyond 0.6000. -IS

Rates

US Rates –Having begun the week on edge, global markets have adopted a more positive tone on the hopes that peace talks will resume and quickly come to an agreement. That optimism, that the conflict will soon be over without any medium term damage to global growth or supply chains has been a feature of price action since the conflict began. When initial timelines fail, the market just kicks the can down the road a plausible distance and goes on believing the narrative of a positive outcome relative to the worst-case scenarios. Whether that is a valid or logical way to approach risk taking is up for debate, btu it is certainly evident in the fact that US equity markets are actually higher than before the first bombs hit Iran. Indeed, given the higher discount rate implied by the surge in rates and bond market yields, one could argue that the S&P500 is factoring an even more positive outlook than before the war began. Perhaps that is related to the fiscal stimulus provided by military spending. The question is whether that negatives the “stagflation” potential. We don’t believe, but see higher long end yields either way.

Outright: USTs remain relatively range bound, but are again exploiting lower yields given hopes of a permanent resolution. Even so, as mentioned, we maintain that medium term risk rewards remained skewed toward higher yields. It will take some time for oil prices to fall and the costs associated with the conflict to date have yet to be fully felt. We are also concerned about the broader geo-political backdrop – in particular whether China and Russia are more emboldened in their own ambitions in the knowledge that everything appears negotiable and more immediately whether a US blockade of Chinese carriers escalates the current conflict and sets it on a new course.

Curve: We remained biased toward a steeper curve. Medium term, the mixture of inflation risks and growth concerns, along with the issuance implications of higher military spending (even if it is to rebuild ammunition stocks), should manifest itself in a steeper curve over time.

10yr Spread to Bund: At 124bps, the spread is exploring new near term lows, and the narrowest level since a push to 100bps in 2023. We see few reasons why the US should significantly outperform, so near term we expect the recent narrowing to reverse and the spread to move back above 130bp. -DM

AU Rates – Market pricing continues to maintain just over 2 hikes by year end and in our view that is the minimum that should be factored-in given both the domestic inflation outlook and global risks to expectations. Hauser’s commentary continued to lean hawkishly despite the acknowledged global uncertainties, but the consumer and business sentiment numbers told the story of the potential hit to the economy should the conflict continue beyond the very near term. Under that scenario, the question is what the RBA will focus on? Do they focus more on inflation risks, in line with their recent missives, or will we perceive a rebalancing toward growth fears? We regard the former as far more likely but the trade-offs between inflation expectations and employment will be in the limelight with tomorrow’s labour market report.

Outright: Both 3yr and 10yr bond futures are trading towards the middle of the broad range that has prevailed since the start of the conflict in the Gulf. That reflects the difficulty in establishing a risk position with any conviction. Even so, we will remain better sellers into strength and would hold tactical shorts off current levels.

Beyond that, with a longer term lens, we are exploring the idea that a hawkish RBA will provide a headwind to any ongoing yield rises. That is, each successive rate hike will see longer tenor yields capped and potentially 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 supported by our RBA forecast of 3 more hikes. Flattening is also supported medium term by the expectation that any sustained 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. The biggest risk is a surge in global long end yields beyond the levels traded over recent months.

Swap Spreads: We see EFPs as largely directional at the moment. 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 demand remains strong in the face of recent supply. So we continue to believe that spread widening will be capped and should be viewed as an opportunity.

10yr Spread to UST: We have been noting that we are watching price action very closely with a view to entering narrowers and some small narrowing exposure has been recommended. We would not add to that position at present, however, given both the domestic policy risks and the renewed global risk aversion that is likely to surge as we begin the week. - DM

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

The NZ 2yr swap rate has consolidated since late-March, between 3.35% and 3.55%, following a war-related surge to a 17-month high of 3.68%. At 3.45% currently, risks are skewed towards a retest of the 3.60% area during the quarter ahead, war-related inflationary pressures likely to keep market pricing for OCR hikes elevated. Our short-end trading bias has shifted from “receive on bounces” to “pay on dips”.

The OIS market currently prices a 100% chance of an OCR hike by July and over three hikes in total by year end. That is slightly more aggressive than our economists’ forecast of hikes in September, October and December (and beyond). The RBNZ last week indicated it was more concerned about the inflationary impact of the war than the risks to growth.

The yield curve flattening trend since December remains intact. We continue to expect the 2-10yr swap (currently 82p) to flatten further, targeting around 65bp during the quarter ahead, and around 50bp by year end. Carry/roll is costly, though, at around 5bp/mth, emphasising timing of entry into fresh flatteners. We would enter a flattener on any bounces into the 90bp-100bp area.

NZGB i-spreads remain stalled after declining from record highs in April 2025, although there could be some performance during the next few weeks given large coupons flows today and next month, the 15 May 2026 maturity, and benchmark duration lengthening. The 2036 i-spread is currently at 37bp. A sustained break below 30bp will probably require either a sustained rise in outright rates (which is our medium term view), positive NZGB supply news (possibly at the May Budget), or declines in UST i-spreads (uncertain). We would be buyers at around 40bp. – IS

Funding, basis, and liability management.

The back and forth of deadlines, red lines, and pipelines continues, and asset markets are largely ambivalent to the news, having seen and heard this so many times. Oil of course continues to gyrate, and the plunge overnight has given a lift to bond and equity markets. This week started the same way as last , with the latest iteration of silly, that being a naval blockade of the Straits.

Throughout this period, notwithstanding near term risks for markets, the overriding concern remains inflation not growth, and while this will flip at some stage, it would appear some have been caught assuming this would be immediate.

Funding markets have behaved in the midst of all of this. Repo in major markets, basis and FX/OIS are contained, perhaps the long arm of CB policy to ensure liquidity has allowed this, even with the quarter end.

In both Australia and NZ, large bond maturities and cash flows are ahead of for April (and May) and this is likely to bring debt issuance. Already, NZ has seen the first Kauri deal in 8 months, with a twice upsized IBRD deal which priced Friday and has reinvigorated that market. LGFA (maturity today) has been opportunistic in this time in both home currency and offshore, while Australian names have been less active going offshore, outside of 1-2 year bank deals.

In Australia, Tuesday was a showstopper, with eight deals announced, one priced, and the rest to be done by the end of the week. This does indicate a fairly healthy credit market, where spreads have retraced.

As we have noted over recent weeks, the Canadian Provvies start their new FY and have C$155bn to issue. In the 2025 period as much as 40% of issuance was offshore, in USD, EUR, CHF, GBP and AUD. So far, the Provvies have issued in their home market, but there has already been a large USD deal priced for Ontario.

We expect the latter to be a focus as cash builds up and this should have an impact to offer Xccy basis, push EFPs lower and push 6s/3s up for those tenors. None of this should be dramatic in terms of market impact but will provide pockets of liquidity.

FX/OIS basis in the NZ market is a little stretched at present while in the Australian market, it remains steady. -MW

Commodities

Crude:

The IEA has warned the Gulf conflict is creating the “largest supply disruption in the history of the global oil market.” Global supply is projected to fall by around 8 mb/d, broadly in line with the drop already seen in March OPEC+ data. With the US now enforcing an “impartial” blockade on vessels entering or leaving Iranian ports across the Arabian Gulf and Gulf of Oman, flows through the Strait of Hormuz remain acutely constrained. No crude or LPG carriers have transited the Strait since Saturday, pointing to a further tightening in physical supply.

There are early signs of diplomatic momentum. Following weekend talks involving JD Vance, both sides appear open to further negotiations. The US has reportedly proposed a 20-year freeze on uranium enrichment, while Iran has countered with a shorter-term framework, with reports suggesting around five years. Pakistani, Egyptian and Turkish mediators are actively working to bridge the gap, with Turkey indicating a potential 45–60 day extension to allow talks to continue.

However, the removal of existing highly enriched uranium remains a key sticking point. Vance is reported to have told Israeli leadership that full removal is the central US demand, while Iran has only offered a monitored process of down-blending — underscoring why mediators are pushing for a longer ceasefire window.

For energy markets, the core issue remains the duration of disruption. With the Strait effectively closed for 46 days, and assuming around 12 mb/d of crude and product exports have been curtailed, roughly 550 million barrels of supply have been removed from the global system.

France and the UK are now pushing for a coordinated reopening, with a summit in Paris this Friday aimed at assembling a multinational maritime mission. More than 40 countries are expected to participate, including Australia. However, while this adds to a sense of diplomatic progress, it is unlikely on its own to restore confidence among shipowners and insurers needed to resume large-scale tanker flows.

CNN reports that 15 US warships were involved in enforcing the blockade on its first day. Even with European-led efforts to reopen the Strait, the absence of commercial shipping suggests the system remains effectively frozen. A meaningful recovery in flows will require a sustained improvement in security conditions rather than diplomatic signalling alone.

As a result, we expect Brent to continue probing the $90–$95 range in the near term. While markets may be transitioning from peak conflict toward a negotiation phase, a material downside move will likely require clear evidence of resumed tanker traffic.

Meanwhile, refined product markets are already reflecting the tightening. Singapore gasoil has pulled back to two-week lows - with April at $191.53 and May at $143.90 - but underlying conditions remain tight. Trading houses continue to scramble for prompt cargoes, while our measure of global product inventories have fallen to their lowest levels since June last year, reversing the record-breaking seasonal build seen earlier in Q1.

Even if diplomatic progress caps headline crude benchmarks, the underlying physical squeeze is extreme. As long as flows through Hormuz remain constrained, real-economy fuel prices are likely to remain under upward pressure.

Metals:

Copper has surged back above $13,000 on optimism that we may be approaching an end to hostilities in the gulf and the potential impact of a sulphur shortage given that production in Chile, Peru and the DRC is dependent on sulphuric acid. Circa 65% of refined copper produced in Chile is produced via solvent extraction/ electro-winning process. One third of the world’s sulphur comes from the Gulf, where it is produced from oil and gas refining and gas to liquid processing. China has indicated it will curb sulphuric acid exports. Circa 65% of refined copper produced in Chile is produced via solvent extraction/ electro-winning process. We are not overly excited by copper prices above $13,000. However, the plunge in ShFE inventory from an all-time high mid-March emphasises the incredible surge in demand there.

While market focus remains squarely on energy, the spill over into aluminium is now material. Gulf producers account for circa 9% of global smelting capacity, and recent disruptions have meaningfully tightened the supply outlook. Earlier curtailments by Qatar Aluminium and Aluminium Bahrain were initially framed as precautionary. However, the situation escalated on March 28, with both the 1.5Mtpa Al Taweelah smelter and Alba’s 1.6Mtpa operations hit. Al Taweelah is now fully offline, while Alba is reportedly operating at less than 50% capacity.

The key issue is restart latency. Smelter restarts are both time- and capital-intensive, particularly where shutdowns involve physical damage rather than controlled curtailments. As such, a return to full capacity likely slips into Q4 at the earliest. On our estimates, these outages could add ~1.25–1.75Mt to the 2026 global deficit. With ~20% of US aluminium imports historically sourced from the Gulf, the loss of this supply base materially tightens Atlantic availability.

Gulf capacity is unlikely to provide a near-term buffer. The physical damage and restart complexity argue for a prolonged supply shock—consistent with the sharp repricing already evident in US Midwest premiums. We have been arguing for higher prices for some time now, so we are not surprised by recent price action.

Gold:

We tend to see gold well supported and a good buy below $4,500. However, rising inflation concerns don’t help the outlook for gold. Hence, $4,800 and beyond looks to cap this week.

Iron ore:

Talks between CMRG and BHP appear to be progressing well with both sides reportedly reaching agreement on key terms. This is now being reported more widely in Australian press. In addition, the EU is introducing a 50% tariff on steel to protect the EU’s steel industry from global overcapacity. The new mechanism will replace the current system which expires on June 30. It reduces the overall amount of steel import quotas by 47% compared to the 2024 quota and increases out of quota duty to 50%. Hence why we have been arguing prices are capped by the $105/ $110 region. -RR

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