FX

AUD – Despite Friday's sharp rebound the door remains wide open to ongoing fresh lows as AU-US 2 & 10yr rate spreads plumb 6 & 12m+ respective lows, with further erosion on the cards. A 5%-handle on the US10yr is not a big call from here, with Fed pricing having little in the way of a concession for even more hawkish tail-risks, while the term premium remains a good 40bp shy of its 2023 peaks when 5% last traded. On the AUD-leg, there is a recognition that if inflation and activity make the case for cuts, the RBA won't hesitate to act ahead of the Fed. Q1 CPI the key local risk this week. AUD a short term sell into the 0.6450/60, targeting sustained trade near the 2023 lows in the 0.62-0.63 region. The ongoing industrial commodity price squeeze can assist AUD, albeit mainly on crosses, with AUD/EUR likely to hold above 0.6000.

USD – Interim USD consolidation likely continues to gain solid support from recent Fed officials pushing against easing risks given US resilience whilst geopolitical tensions are also at play. Fed speakers now enter their period of silence ahead of the FOMC and so data flow will be of increasing interest with 1Q GDP this week likely to reflect recent strong data and bias is for a firm outcome for Friday’s PCE update, both of which will underscore the growth and policy divergence. Support is becoming more evident in the 105.50-75 area and should allow DXY to retest 106.50 within potential moves towards the 107.75 area, even though moves may become less dynamic.

EUR – Despite geopolitical flare-ups and growing Fed speakers discussing extended policy patience, EUR consolidated above 1.0600 into the end of last week. Diverging economic and policy stances still suggest further bouts of EUR underperformance, but ECB officials have started to acknowledge the economic interdependence with US. This may temper the downside potential for EUR especially as ECB officials have more openly referenced risks of imported inflation. Regional Flash PMIs may also indicate improving conditions within the Eurozone. Nevertheless, EUR/USD rebounds are likely to struggle into the 1.0700 area and the continued divergence of activity and policy still suggest slippage to test support into 1.05 and potentially the October lows around 104.50.

JPY – US 1Q GDP and PCE data will jostle with Friday’s BoJ as interim drivers of USD/JPY. Last week’s mild national CPI may limit the scope for tweaks to BoJ projections and so their guidance and threats of FX action, especially after last week’s united front of containing FX moves from G7 meetings. However, any intervention action will likely be directed towards avoiding acceleration in the current uptrend or if JPY weakness becomes more apparent against other Asian currencies and FX majors. Strong US strong growth, diverging yield spreads and extended US policy patience still suggest more upside in USD/JPY. USD/JPY continues to threaten the 155.00 area amidst gains potentially pushing towards the 1990’s highs around 160.00.

CNH – The PBOC's reference has been set above 7.10 4 days in a row and USD/CNY continues to push hard up against the top the +2% band. With local rates out to 2yrs more than 300bp below US rates substantial onshore USD demand leaves USD/China risks slanted decisively to the topside. On rate spreads alone there's a case for USD/CNH meaningfully above 7.40. Better domestic activity trends will do little to turn CNY with yield support so lacking. The US Nov election adds more upside risks for USD/China, re Trump's tariff & China decoupling plans. USD/CNH a buy into the 7.2360 region if seen. – RF&TR

NZD - NZD/USD retains further downside potential, albeit limited given the total magnitude of decline this year. Last week it reached 0.5852 – a six-month low, and it’s possible it could test the October low around 0.5775 during the weeks ahead. These levels should be of interest to hedging exporters. The strong US dollar has explained most of the decline in NZD/USD this year, with falling NZ-US yield spreads an additional factor. Those themes could continue this week, with US GDP and PCE inflation data of much market interest. Geopolitical events in the Middle East could also feature. Looking much further ahead, if our economists’ forecasts for the Fed and RBNZ (easing to start in June 2024 and February 2025, respectively) prove correct, NZD/USD could rebound towards 0.6400 by year end. Alternatively, if the Fed were to defer its easing cycle, the NZD recovery would be smaller.- IS

Rates

US Rates – Geopolitical tensions will remain at the forefront of market considerations this week. While the lack of immediate retaliation out of Iran went some way to calming nerves around an imminent escalation, assessing the ongoing threat implies the potential for ongoing and significant volatility.

10yr yields traded through all but 6bps of their weekly range on Friday, after unwinding all of the initial safe haven rally. Outside of that, the market continues to re-calibrate what “higher for longer” might mean for yields. Price action is highly sensitive to guidance from policymakers, most of whom are telling the market to be patient and admitting to caution around inflation. This week’s PCE deflator will allow either a confirmation or re-calibration of that messaging. There are now less than 2 rate cuts factored-in for 2024, with December dialled down to below 40bps and the data is being parsed with a bearish mindset. What might that mean for USTs and the 10yr note’s tactical trading range? We suspect that bearish sentiment and momentum has further to run, with 4.75% the next target and a return to last October’s highs around 5% appearing to increasingly considered.

This surge in bearish sentiment and momentum is challenging some of our long-held expectations. That is, we have long been advocates of a tactical dip-buying approach on the view that investors will continue to seek yield as we transition to an easing cycle. At the same time, we have cautioned that the most likely prospect for price action was an extended range-trade, even if an easing cycle is begun this year. The recent sell-off will have been a painful experience for those who have already set strategic long duration positions and there will certainly be more caution about adding to the position. That suggests that the trading range will need to ratchet higher in yield terms to encourage renewed demand. So this week’s combined $183 billion calendar of 2yr, 5yr & 7yr note auctions — the first two of which will be at record levels — will be a test of that. Overall we are neutral outright yields at current levels and expect the 2-10yr bond curve to further disinver on further bearish impulses.- DM

AU Rates – RBA pricing has been pared in line with the US re-pricing. There is now only around an 80% chance of a 25bp cut factored-in for 2024. That is clearly out of line with Westpac’s current forecast of two cuts this year, beginning in September but it does reflect the general global consensus that the RBA is unlikely to cut before the Fed. While Westpac’s Chief Economist Luci Ellis has written about how that could play out, the market is clearly showing an unwillingness to consider that possibility, although an improved quarterly CPI outcome this week could change that perception. So it will be down to the data, as usual.

For now, directional impetus will be led by US outcomes and so will the curve. There will be ongoing geopolitical influence on semis & SSA performance, with the semi market also trading heavily due to a focus on the upcoming budget season and its implications for supply. QTC has continued its underperformance versus NSWTC and is likley to do so given last week's updated borrowing announcement by Treasurer Dick. Medium term, we continue to see fisclal repair as a priority for the sector, but whether the market has patience for the timeline that that will have to be taken out on is another question. Shifting to cross market relativities, AU outperformance during US-led sell-offs should continue to see the 10yr AU-US bond spread make incremental gains. While the current spread of around -30bp will surely be a deterrent to global investor flows, we would still fade any widening impulses.- DM

NZ Rates - NZ swap rates retain upward momentum near term. Major drivers have been the mostly solid economic data in the US, hawkish comments from Fed officials, and NZ non-tradables CPI which was stronger than the market or RBNZ expected. The 2yr swap had risen 40bp from the beginning of April to early last week when geopolitical events in the Middle East allowed it to pause. From here, there’s potential for further gains to 5.25% during the weeks ahead.

Such gains could be fuelled by US economic data, with GDP and PCE inflation out this week. The NZ data calendar will be low key until the Q1 labour data on 1 May.

Market pricing of OCR cuts has been significantly pared over the past few weeks, with August now reduced to a 40% chance. October is seen as plausible at 80%, although our economists continue to forecast no cut until Feb 2025, noting core inflation remains sticky. - IS

Funding, basis and liability management

Funding markets were largely dominated by risk-off moves in relation to Israel’s strike on Iran. While headline information saw the market rally, trading was largely muted as market participants waited to gain more certainty on tensions in the middle east.

A$ FX/OIS basis remains subdued in the 1 month tenor, however, we continue to see a slight uptick in the 3 month tenor. BOB spreads have moved wider and we view this as a normalisation following moves lower post the fixed rate full allotment repo discussion which we have mentioned in earlier SVOAPs. Markets also look towards the upcoming June TFF maturity, where funding had been more volatile leading up to the prior maturity. Our view is that FX-OIS and BOB spreads will largely remain more muted over the longer term despite spikes in the shorter term.

Outright yields traded lower following headlines of the geopolitical conflict, however, reversed its moves to end the week largely unchanged. The 3 year swap holds above 4%, a level that we had flagged to have a gravitational pull. The floating to fixed rate in 3s, which was at a level of -52bp at the end of March, is now at the -28bp level making hedges a bit less compelling. Markets will focus strongly on his week’s CPI figure, and while the general consensus does reflect that the RBA is unlikely to cut before the Fed, a weaker CPI print could price more easing into the front end. Markets have largely adjusted to a “higher for longer” scenario in-line with US pricing, there currently remains a 70% of a rate cut factored in before November. With the improved labour market outcome last week, CPI data week should provide more clarity on whether Australia faces a decision to cut before the Fed.

Impacting the A$ funding market today, the market looks towards significant cash flows taking place in Australia. The Apr-24 target bond matured yesterday and pays back into the market today. The March month end cash at the RBA from the government accounts has risen to around A$90bn ahead of this, the highest level since early December 2023. This maturity has seen the AOFM bring about an $800mn tender of the 0.5% Sep-26 bond today. - UC

Commodities

Crude:

Crude markets are clearly trading as if the moderated nature of the first ever direct strikes between Israel and Iran, rather than through proxies, will not develop into full-scale conflict. And with clear signs of a deterioration in supply/ demand balance, with the surge in crude inventory in the US, which hit the highest level since June last year, plus ongoing evidence of weak product demand with apparent US diesel demand falling to its lowest seasonal level since 1999 on a 4-week average basis, plus contracts in the US, Europe and Asia flipping into contango, little wonder that the $90/95 level is proving such an important cap. However, the US last week allowed a Treasury Department license permitting oil and gas production in Venezuela to expire without renewal and the Ukraine/ Israel funding bill that passed the House on Saturday included sanctions on Iranian oil. So those factors should limit the downside. We stick to the view that it’s hard to see a major push above the $90-$95 region without a further spiral in geopolitical risks.

Metals:

We remain wary of copper above $9,500 though would be the first to admit we have been wrong about the recent strength. We completely get why the market has turned bullish on metals given mine disruption, rising energy transition/ AI demand and likely central bank rate cuts later this year. However, the spread between spot and the 3m LME copper contract remains close to fresh 3-decade lows pointing to low physical demand. At the same time, global copper inventories are approaching the highest level in 4 years and continue rising which is not what you would expect to see – indeed, it’s the reverse of what you would expect. Bloomberg also reported last week that ‘Chinese smelters are looking to deliver shipments of refined copper’ with “at least three smelters eyeing an increase in exports” and “two of them planning to ship about 10,000 tons each for delivery to either domestic warehouses or to the LME depots such as Busan”. All this adds to the view there really isn’t the prompt demand supply imbalance required to push copper sharply higher at the moment.

Iron ore:
Chinese steel dumping into global markets is beginning to gather increased focus among global steel producers. USTR Katherine Tai was highly critical of China’s “nonmarket practices” which are threatening the steel and aluminium sectors in the US in a Bloomberg interview. Chile also slapped anti-dumping tariffs on Chinese steel products with a 33.5% import tax on steel balls and 24.9% on steel bars. The move follows US President Biden last week calling on the USTR to triple the tariff on Chinese steel from 7.5% to 25% that was levied on top of Trump’s steel tariffs. Exports have been an important ‘release valve’ for China’s overproduction of steel, and last week we had data confirming that we are approaching the record highs seen in 2015. If we start to see a rising global backlash to Chinese dumping of excess steel, that should help to cap iron ore in the ‘mid teens’. - RR

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