FX

AUD - A bruising end to the week saw AUD give back the best part of US1.2c from mid-week highs to 0.7150 - not a fatal collapse, but a meaningful reset of short-term parameters. Iran headlines haven't been the explicit driver of AUD's downside, though Trump's comment that Hormuz may not need to open "at all" certainly challenges the resolution timeline from weeks to open-ended. It's bond markets that are extracting a toll: USTs, gilts & JGBs all through key levels, with FX/rate correlations snapping back as a direct consequence. A full Fed hike is now priced by March 2027, which is driving some compression in AUD's rate support. Markets also went into last week pricing US-China deal optimism: plenty of stage-managed optics, but only modest agreements, leaving a sense of managed co-existence, rather than anything durable. A modest AUD negative at the margin.

AUD has more risks to navigate this week. FOMC minutes (Wed), the risk being "many" or "most" favour neutral guidance, up from "some" in March and "several" in Jan. There's plenty on the AUD-leg too: May consumer sentiment & RBA minutes (Tue) and Apr jobs (Thur). The jobs report feels asymmetric: a solid read changes little, but a weak one feeds the "RBA hawkishness has peaked" narrative, which would directly play into a market itching to reprice rate spreads against AUD. NVIDIA earnings (Wed) is stress test too.

1-2wks: Range reset lower. 0.7100–0.7110 is the operative floor (lows of the last month). A sustained break opens 0.7000. 0.7200 has obviously shifted from support to resistance. The Iran "containment trade" is still the dominant framework - escalatory US rhetoric remains theatre within a "coercive bargaining" framework, but the rates headwind facing AUD is now a co-driver of downside risk, rather than background noise. A credible Iran breakthrough remains the key catalyst that could break all this, for a return to 0.7250+; absent that, the range trades heavy. We are not inclined to get too bearish AUD beyond 0.7000: US30yr yields near 5.15% have consistently been the Trump "TACO" zone (April 25 Liberation day climb down and Jan 26 Greenland climb down).

3-12wks: Market patience meets real-economy damage in this window. A hard impasse + weak global data = AUD lower (the inventory buffer clock is ticking!). But, Strait reopening = AUD upside, ignoring weak data entirely. Range 0.7000–0.7500, our bullish skew is intact, but centre of gravity shifting lower within that band. The 2025 post Liberation Day analogy holds - after an impulse rally grinding containment sets in.

12wks+: At this horizon AUD structural bullishness is reinforced, but we note that interest rate differentials may well have peaked, so this is very much a commodity and structural USD impairment period of AUD upside. The conflict accelerates USD impairment - petrodollar architecture stress, Gulf SWF reconstruction financing pressures, and a questionably executed war, eroding long-term US confidence. The direction of travel is de-dollarisation and a renewed push by long-horizon investors to diversify and hedge USD exposure. This requires a lower-volatility backdrop to express cleanly, but the trend is clear.

Australia sits on the right side of an energy terms-of-trade shift for a world newly reminded of the cost of energy insecurity. Super fund FX hedging should resume beyond the conflict horizon, and with greater structural force than before. The roughly AUD100bn in deferred net AUD demand from hedge-ratio “normalisation” has been postponed, not cancelled - and is likely to be released against a backdrop of structural USD weakness. AUD/USD at 0.75 remains plausible by 2H26. The key risk would be a material cooling in domestic growth and the labour markets alongside Fed hikes, that undermines AUD yield support. -RF

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

NZD/USD last week broke below the 0.5930-0.5990 range prevailing in early May. This week, a test of 0.5800 is possible. Earlier expectations of a possible de-escalation in the Iran war have given way to concerns that a stalemate could persist for some time, in turn inflicting economic damage via higher oil prices and supply chain disruption. In addition, NZ economic data last week was consistent with a slowdown ahead. This week’s local data highlights will be April retail spending data, and the RBNZ’s surveys of household expectations and business expectations (the latter a recent newish series). For the quarter ahead, we retain a neutral bias, pending resolution of the Iran war. An escalation would likely cause a break below 0.5700, towards 0.5500, while a positive resolution would likely ignite a rally towards the 0.6100 area. -IS

Rates

US Rates – UST yields surged higher on Friday, as global bond markets seemed to collectively re-price the risks that of an extended closure of the Strait of Hormuz. It was the worst week for USTs in a year, with 2yr yields up 13bps and 10yrs up 25bps. Both are now at or through key technical levels, with a breach of the 4.6% level in the 10yrs opening the way for 4.75%. Whether or not that level is reached this week, the market is trading very heavily, and we continue to expect higher yields over time, although for now, given the size and rapidity of the move, a brief consolidation phase would not surprise. Bond markets will obviously maintain their high correlation with oil prices and there is little reason to expect them to revert to a satisfactory level near term.

Outright: It would appear that yield ranges across the UST curve are ratcheting higher as whatever the timeline for an off-ramp to the US-Iran conflict, 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. Inflation will remain high and issuance will remain large and potentially move much higher. So we would remain strategically short duration and tactically look to sell rallies.

Curve: We remain biased toward a steeper curve. Medium term, the mixture of inflation risks and growth concerns, alongside long-term issuance trends, should manifest itself in a steeper curve over time.

10yr Spread to Bund: There has been a significant US underperformance in recent days, pushing the spread to 146bp, which makes USTs the “cheapest” they have been since November last year. We would be surprised if this underperformance continues at the same rate in coming days, but recent spread performance suggests that global investor’s perceptions of US risks have shifted. -DM

AU Rates –This week’s mix of RBA communications (Sarah Hunter speech, MPB Minutes) and key data releases (labour, sentiment) should provide some domestic-led pricing impetus. Even so, there remains just over one-and-half 25bp rate cuts in the forward cash profile and we don’t see that changing much any time soon. Our own 2 hike forecast is largely in line with market expectations, although the timing of moves is up for debate. For example, there remains around a 20% chance of a June hike priced-in and that could easily arise ahead of the meeting, while the next move is not fully factored-in until September. Regardless of how the actual cycle pans out, however, a further one-to-two rate hikes is the minimum that should be factored-in given both the domestic inflation outlook and global risks to expectations.

Outright: The Budget has come and gone without materially shifting market valuations. Overall fiscal policy is still pro-cyclical but not sufficiently so to shift RBA policy expectations. ACGBs issuance is slightly lower than expected, but within the forecast range and in a practical sense it means that the market will be absorbing around the same amount of nominal supply each week.

Looking beyond the Budget, given that we expect domestic policy risks to remain hawkishly-skewed, we remain better sellers into strength. Beyond that, with a longer term lens, we are exploring the idea that a hawkish RBA will eventually 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. Maybe that narrative will gain impetus over coming weeks, however we believe it is too early to adopt “end of cycle” strategies.

Curve: We have been recommending curve flattening exposure for some time supported by our RBA forecast of a 5 hike cycle. 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, which suggests that the widening impulse in 3yr EFPs slows in coming days.

Semi Spreads: The semi sector will underperform during “risk off” impulses, however we continue to believe that any material spread widening will be capped and any such moves should be viewed as an opportunity. The next budget due is Tasmania’s on 21 May followed by SA on 4 June and then NSW and QLD in late June. There will be ongoing focus on fiscal priorities and the implications for issuance and ratings. The needless damage to global oil infrastructure and its associated costs will make fiscal repair a more difficult task, as will any cost of living concessions to support consumers and business. A further focus will be on the costs associated with the Federal Governments decisions around the NDIS and health funding.

10yr Spread to UST: Having been relatively stable in recent weeks, the 10yr spread has narrowed around 8bps since the Budget. Clearly a $125bn borrowing requirement was sufficient to reinforce Australia’s superior debt metrics in the eyes of global investors. We have held narrowers since 68bps. The spread is now 55bps. It will narrow further. -DM

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

The NZ 2yr swap rate last week broke above the 3.20%-3.60% range prevailing since March, and risks a move higher to 3.80% during the months ahead. The RBNZ’s tightening cycle looms, and war-related inflation could persist for longer than expected, threatening inflation expectations.

Market pricing for OCR hikes in 2026 was volatile last week, but closed little changed, with OIS rates implying a 30% chance of a hike in May, and a 100% chance of one by July. There are slightly more than three hikes in total priced by year end, not too dissimilar to our economists’ forecast of hikes in September, October and December.

The yield curve’s flattening trend since the peak in late December remains intact, the 2-10yr swap at 78bp vs December’s cycle peak at 120bp. We expect further flattening during the year ahead as we approach the RBNZ’s tightening cycle, the 2-10yr swap with potential to reach 50bp.

NZGB i-spreads have trended lower from record highs in April 2025, the 2036 i-spread currently at 34bp. We would be buyers on any bounces to 40bp. The main catalysts for further performance would be a sustained rise in outright rates (which is our medium term view) or positive NZGB supply news from the May Budget (although our economists expect an increase in projected issuance). UST i-spreads are a risk, noting the 3bp rise last week. -IS

Commodities

Crude:

Oil traded higher into Friday's close following the sell-off in bonds with WTI closing above $105/bbl and Brent above $109/bbl . With no US-Iran resolution in sight near-term, we stick to our base case of a move through the $110s into a $120-150 stagflationary range if the Strait remains shut through May and June. US SPR releases and use of Venezuelan crude probably placates prices for the time being however time is running out. The US has allowed the waiver allowing sales of Russian oil to expire despite supply remaining increasingly tight. A big mitigator has also been China reducing their demand for crude to reduce competition for barrels but again there is a limit to which they can keep reducing their demand.

The latest Australian MSO data showed we had 44 days of gasoline, 35 days of jet kerosene and 36 days of diesel as of last Tuesday.

Metals:
Aluminium and copper saw notable corrections on Friday falling more than 2.5% intraday after hitting new multi-month highs mid-week at $3690/t and $14196.50/t. With the broad rally in bond yields, this dragged stocks lower which halted the AI/electrification gains that have been driving copper and Ali higher. However apart from short-term noise, closure of the Strait disrupting sulfuric acid production (used for extracting copper from its ore) alongside disruptions in Chile and Indonesia, and strong US demand have been key drivers of higher prices in copper. Meanwhile, US auto manufacturers have flagged higher commodity expenses and Aluminium costs due to disruptions at large smelters in the Middle East. As such, we continue to see a bullish case for metals.

Gold:

Gold continues to trade across its 50dma and 200dma range of $4340-4730/oz which likely continues until the war is resolved. A break below $4342 would be a bearish signal. Last week, India more than doubled its gold tariff to 15% from 6% to defend the rupee and also implemented new import restrictions. Given jewellery demand as a whole has in recent made up 28-30% of global demand in the last few years of which in India makes up the second largest component after China, this could see a noticeable drop off in demand. This combined with relatively more hawkish Fed expectations has introduced some downside risks in H2.

Iron ore:

Metal production at Chinese steel mills seems to have peaked with prices touching $112.15/t last Monday. This combined with mills entering the seasonal summer maintenance period (June-August) leaves us with a bearish outlook moving forward. -KB

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