Overnight Market Wrap

Summary: Oil prices initially firmer Monday, with Brent rising to $110/bbl – sending the 10Y UST yield above 5% – before receding. Equity markets slightly weaker – S&P500 closes down 0.5% – as AI concerns weigh on chipmakers. US initially strengthens on initial risk aversion but then gives up most of its gains.

Currencies: The US dollar index is modestly firmer since 5pm NZT, having paired earlier more significant gains. EUR initially falls 1.1523 before rebounding to 1.1547. USD/JPY hits peak of 155.00 before falling back to 154.38. AUD initially falls to 0.7108 before rebounding to 0.7139. NZD hit a low of 0.5757 before retracing to 0.5776. AUD/NZD was relatively steady, trading around 1.2350.

Commodities: Brent crude oil (front futures contract) rose to $110 before falling back to $106 on talk of a potential new “phased” US-Iran deal and increases Saudi shipments through the Strait of Hormuz during East-West pipeline closure, copper futures fell 2%, iron ore fell 1.1% to $97, and gold fell 1.9%.

Interest rates

The US 2yr treasury yield rose from 4.61% to 4.66% via an earlier peak of 4.68% – a two-year high, while the 10yr yield rose to 4.99% after earlier reaching a peak of 5.01% – a three-year high. Markets continue to price a 90% chance the Fed funds rate, currently 3.625% (mid), will be hiked by 25bp at the next meeting on 16 September, with 100% chance of another hike by December.

Australian 3yr government bond yields (futures) ranged between 4.98% and 5.05%, while the 10yr yield ranged between 5.34 and 5.40%. Markets price a 75% chance the RBA cash rate, currently at 4.35%, will be hiked by 25bp at the next meeting on 29 September, and over a 100% chance by November.

New Zealand rates markets price a 60% chance the OCR, currently at 2.75%, will be hiked at the next meeting on 28 October, and over a 100% chance of one by December.

Event Wrap

Most interest overnight centred on the oil market. Iran’s plans to formally unveil an agreement on a temporary shipping lane through the Strait of Hormuz were postponed, with Oman’s foreign minister citing a desire to ensure “appropriate conditions for constructive dialogue”. Together news with news that the Saudi East-West pipeline might be closed for several weeks, this sent oil to its session highs. However, sentiment later turned after President Trump touted an 'agreement' that Russia and Ukraine will not target energy infrastructure, as well as a potential new deal with Iran. Later reports citing Pakistani sources suggested that the US may seek a "phased" step-by-step deal with Iran.

The other focus overnight was AI, with the leaders of major companies such as Anthropic, OpenAI and SpaceXAI calling for a slowdown in the pace of development of the most advanced systems, to allow time for the risks to be better understood.

NZ: August REINZ data suggested that house prices were down 0.9%yr while sales were down 13.5%yr, amid ample supply and higher mortgage rates.

Event Outlook

NZ: August retail card spending is expected to partly unwind last month’s strong gain (Westpac f/c: ‑0.2%mth).

China: August retail sales will provide a read on consumer demand, which has remained subdued in recent months. August industrial production will also be released, with manufacturing continuing to outperform, while fixed asset investment is expected to remain in contraction (market f/c: ‑7.1%yr ytd).

Eurozone: The September ZEW Survey of Expectations will be released, with recent readings consistent with improving confidence. The July trade balance will indicate whether the surplus was maintained following tariff‑related disruptions.

UK: The July ILO unemployment rate is forecast to remain steady, with spare capacity in the labour market continuing to act as a disinflationary force (market f/c: 4.9%).

US: The September Empire State Manufacturing survey is expected to point to resilient business conditions (market f/c: 15.0).

Market Outlook

AUD/USD 1 day: Consolidating in the mid-0.71s.

AUD/USD 1-3 month: For the month ahead, risks remain skewed to the upside, a break above 0.7240 resistance possible. The AU economic data pulse has been supportive, as has market pricing for RBA rate hikes (almost two hikes are priced by mid-2027). Against that, though, USD factors could swing either way – war, Fed guidance (2.5 hikes are priced), and USD/JPY intervention risk being a few examples. (3 September)

NZD/USD 1 day: Waiting to see if break of 0.5800 is sustained (Kiwi data due today) but overnight move consistent with our previous bearish bias (see below).

NZD/USD 1-3 month: Our month-ahead bias has shifted from neutral to bearish following yesterday’s dovish RBNZ hike. A retest of support at 0.5800 (a 50% retracement of the July-August rally) is possible, as is a test of 0.5760 (62% retracement). A key feature of yesterday’s RBNZ MPS was the modest reduction in its OCR projection for the Q4-26 quarter, which arithmetically signals a hold in October and a hike in December. The RBNZ’s more moderate tightening bias is likely to weigh on the NZD during the month ahead. (3 September)

AUD/NZD 1 day: Potential for further gains towards 1.2400 multiday, although an overbought condition warns of an eventual reversal.

AUD/NZD 1-3 month: Attempts to break below the 1.1925-1.1985 major support area in July failed, signalling a moderate rebound to the 1.2200 area. Then, a string of solid AU data outturns (including CPI) caused markets to reprice RBA hikes. And following that, the RBNZ delivered the widely expected September hike but its guidance for further hikes was tempered, taking the cross up to almost 1.2300 – the top of its six-month old range. Should 1.2300 give way, we’d be targeting around 1.2500 multi-month. (3 September)

AU swap yields 1 day: The 3yr swap rate should open around 4.96%, the 10yr at 5.41%.

AU swap yields 1-3 month: The 3yr swap rate is testing the upper boundary of its six-month old range at 4.80% and is vulnerable to a break higher towards 4.95% (March peak) during the quarter ahead. AU CPI and GDP data were recently stronger than expected, encouraging markets to price in another RBA hike. (3 September)

NZ swap yields 1 day: NZ 2yr swap rate should open modestly firmer at 4.05%, the 10yr up slightly at 4.74%, in response to global (particularly US and AU) interest rate movements.

NZ swap yields 1-3 month: The 2yr swap rate last week broke above its two-month old range of 3.60%-3.80%, driven by gains in other countries’ bond yields, and reached 4.06% - highest since August 2024. Into year end, we expect a 3.80%-4.10% range, absent international surprises. Our economists expect the nascent economic recovery to continue, which should result in higher swap rates during the next few quarters. (14 September)

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