FX

AUD: We steadied Fri after a frantic Wed/Thu selloff drove us from >0.7000 to marginally below the Oct consolidation area, following stronger US Sep CPI, soft local labour-force data and AI stress. Friday’s recovery (0.6916 to 0.6967, 0.6947 close), keeps the heavy Oct consolidation picture intact after a late-week scare, but some weighty new catalysts are suddenly bearing down on AUD and the mix is less than ideal for AUD-crosses. Weaker RBA pricing and unstable AI/risk sentiment weigh, while softer broad USD momentum and steadier US yields provide a cushion. This is not a cleanly constructive signal for AUD/USD (!), and is clearly negative for AUD crosses, where recent highs in AUD/EUR and AUD/NZD are unlikely to be revisited soon. Thu’s 0.6894 low is not yet proven durable, but the wider 0.6800-0.6900 area remains a credible structural floor, with 0.6865 and 0.6830 the key markers. On the upside, 0.6980-0.7000 remains the hurdle.

1-3wks: Expected range 0.6830-0.7100. AUD/USD’s Oct stabilisation remains intact, albeit under greater strain from volatile AI/risk sentiment and the loss of domestic rate support. The counterweight is the USD’s failure to sustain gains despite strong US Sep CPI/PPI. A quarterly Fed hike profile to Jun 2027 is now embedded and thus less likely to deliver fresh upside for the USD. That mix should help prevent any AUD correction from becoming a new impulsive breakdown, though oil at $110 highs complicates the US-rates cushion. Base case remains that 0.6800-0.6900 provides a credible structural floor. China Sep activity data and RBA speakers Kent and Hauser (Mon & Wed) are the immediate events. They can preserve RBA hike optionality, but Q3 CPI (28 Oct) is the key.

4-12wks: Expected range 0.6830-0.7250. Not ditching our mildly constructive medium-term AUD framework, but Q3 CPI on 28 Oct must now do more work to revive the prospect of a Nov RBA hike. Long term US yields have struggled to sustain their post-inflation highs too, as AI investment and funding concerns generate a growth-scare. If this persists, lower US yields and a weaker USD would compensate for reduced RBA rate support.

12wks+: Target 0.7300. AUD’s structural positives remain intact: the highest G10 carry, healthy fiscal metrics, exposure to commodities in a resource-constrained world and direct leverage to ongoing AI and energy-investment cycles. AI is clearly showing stress. This weighs on AUD crosses through risk channels, but is also becoming a potential cushion for AUD/USD through lower US yields and a weaker broad USD. The durability of USD exceptionalism could also be challenged by 3 Nov midterms and the risk of a contested outcome leaving political discord and institutional stress underpriced. That could reignite diversification and de-dollarisation flows.While not the base case, a simultaneous breakdown in the AI investment cycle, industrial metals and Australian housing should not be ignored, though this remains more of a 2027 risk. -RF

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

The NZD was the top performer among G10 last week, helped by AUD/NZD selling following the softer AU labour data, as well as comments from RBNZ Chief Economist Conway who allowed for either a hold or a hike on 28 October, and of course, the pullback in the US dollar. The recent rise in NZD/USD comes from a technically oversold state and short positioning among speculators, suggesting further upside this week to 0.5700 is possible, with support now at 0.5630 (previously resistance).

The main local event for markets will be the NZ Q3 CPI data on Thursday. Markets expect a 0.8%q/q and 3.8%y/y outturn, with any surprise to that likely to spill over into market pricing for the RBNZ OCR decision on 28 October. The US calendar is low key.

Last week we took profit on our short NZD/USD position at 0.5615 (entered 9 Sep at 0.5830 with a 50 pip trailling stop), returning 3.7% plus carry.

Looking further ahead to year end, a NZD/USD recovery to 0.5800 is plausible. Fundamental scenarios supporting a recovery include mounting evidence of NZ’s economic recovery, a pullback in the US dollar as Fed hiking expectations are pared, and the return of the de-dollarisation theme.-IS

Rates

US Rates – After dramatic rises over the past couple of months, UST yields fell across the curve last week (2yr down 8bps, 10yr down 18bps) as they revisited their traditional “safe haven” role in global markets. The question is whether the “risk-off” sentiment driving price action will continue this week. Fears around the AI build-out could certainly fuel further rallies, however the bearish fundamentals which have driven higher yields across the global remain valid. Oil prices have surged again as the volatile conditions in the Ukraine and the Middle East persist. The fiscal picture for the US and other sovereigns remains bleak and despite Warsh steadfastly avoiding guidance, the theme of Fedspeak has broadly been an acknowledgement that vigilance on inflation will remain high, despite a hike at the October FOMC being unlikely (currently ascribed a 20% chance).

Outright: So, is the bond rally a harbinger of things to come? That is, with just under 3 hikes in the forward profile, have we seen the yield high? Is the market confident that the Fed will be able to contain inflation and/or will economic activity slow from here, aided by a slowing in the AI build-out? That is a plausible scenario which will at the very least provide a headwind to higher yields. However, we believe that persistent inflation will continue to limit the extent of any rallies and so we continue to view the current rally through the lens of the broader "higher for longer" narrative and therefore place limited weight on the prospect of a sustained decline in yields based purely on the current “risk off” sentiment.

Curve: The curve continues to reverse the recent steepening trend of the past few weeks and has seen a strong bull flattening over the past week. While the global equity rout continues to weigh on the long end, policy expectations remain the primary driver of the front end. Geopolitical uncertainty and term premium risks associated with the approaching mid-term elections continue to present headwinds to further policy-driven flattening. We would have limited risk on the curve, but would maintain a small steepening bias.

10yr Spread to Bund: The spread has seen a strong narrowing move over recent sessions after touching 15-month highs. While we see risks to a move narrower due to the global flight to quality narrative, medium term fundamental, fiscal and political backdrop in the US suggest the spread should consolidate at wider levels, above 150bp. - DM

AU Rates: There is nothing market moving on the domestic data slate, so the comments by the RBA’s Kent and Hauser this week will be the main focus. Insights into the trade-off between inflation and labour will be keenly parsed given last week’s downside surprise and the market’s reassessment RBA tightening risks. OIS pricing for November has been pared back with just under one rate hike now factored into the forward cash curve. While the labour data print presents risks to our higher for longer RBA narrative, inflation data will still be watched for energy price passthrough and will be the focus for shaping expectations around a November hike. Given the Governor's emphasis on inflation risks stemming from higher energy prices linked to Middle East tensions, we remain cautious about calling an end to the hiking cycle prematurely.

Outright: Domestic yields have rallied in line with global counterparts as the AI equity rout continues to drive a flight to quality. We had fully expected a consolidation phase to evolve post the recent surge in yields, and recent price action can best be viewed through that context. While there remains the ongoing risk of periodic short squeezes, there is little fundamentally to underwrite a long duration position. As such we remain better sellers into rallies.

Curve: The curve is basically mid-range on a multi-month view, having steepened recently as RBA policy risks were re-calibrated. Even so, over the medium term, the combination of a hawkish RBA and potential “yield enhancement” support from global investors will provide flattening pressure. The biggest risk to our “flat for longer” view is another surge in global (US) long end yields but that risk has diminished over recent days.

Swap Spreads: 10yr EFPs have continued hover around the upper end of the range. While we would not assign much probability to a sustained move wider, a break outside of recent ranges could see a wider range established. Any extension of the bond rally, would support such a move.

Semi Spreads: Semi spreads slightly retraced the last widening move but have ticked up again on issuance activity and expectations. We see little shift in the demand profile emerging and therefore expect good support on any issuance related dips.

10yr Spread to UST: Australia has underperformed the US as investors flock to fixed income assets amid the risk off sentiment. While we would expect some consolidation around this area especially given the past performance in this spread, we still continue to expect further narrowing over the medium term given fiscal dynamics. - DM

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

The 2yr swap rate rose late last week, following comments from RBNZ Chief Economist Conway. He said either a hike or a hold is possible on 28 October, which gave markets confidence to price more into that meeting. The 2yr jumped from 3.98% to 4.08%. From here, we see potential for slightly higher, but likely capped by 4.15% - the September high. NZ CPI data on Thursday could be decisive, either sealing the deal for a hike on 28 October or casting doubt on that outcome.

Market pricing for that meeting has jumped sharply from last week, now at an 83% chance of a hike, vs 60% a week ago. Historically, whenever pricing has been greater than 70%, the RBNZ has hiked.

Looking further ahead, absent international surprises and assuming our economists’ expectation that the nascent NZ economic recovery continues, fresh highs in swap rates by year end are possible. However, a plethora of international risks (wars, oil prices, central bank actions, fiscal risks, and risk sentiment) adds caution to the view.

The yield curve’s flattening trend since the peak in late December 2025 is resuming, having been interrupted by the global bond market rout in September. The 2-10yr swap curve is currently at 62bp, and could test the bottom of the past month’s range at 60bp this week (assuming no dovish surprise from NZ CPI data). We advocate receiving on any bounces to 70bp.

The downward trend in 10yr NZGB i-spreads remains stalled, the 2036 at 33bp (near the 31bp cycle low) and the 2038 at 37bp (vs 38bp at issuance). Longer term, we expect slightly lower i-spreads as swap rates rise further amid the RBNZ’s tightening cycle, but near term consolidation could persist amid contagion from global fiscal concerns, and the looming NZ election on 7 November.

For investors seeking NZ short duration opportunities, we advocate buying the Apr-27 LGFA bond, which can lock in around a +20bp return if hedged with OIS and funded via the RBNZ RRP facility, or OIS+30bp if unfunded. - IS

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