FX

AUD – Tentative basing signs around 0.6700 are encouraging and reinforce the impression that a more constructive medium-term AUD/USD picture is unfolding. That is a break from the recent past that saw AUD reset all the way back to sub-0.64 levels after a failed advance towards 0.6900. Matching that, the revival of the US resiliency theme, which has seen Fed terminal pricing for Mar'26 SOFR futures back up a whopping 55bp+ in the last month, has arguably runs its course. Fed pricing is now more or less in line with the Fed’s dots and further hawkish repricing seems less likely. China’s policy stimulus pivot adds to the sense that AUD can base at higher medium levels than we have been accustomed to over the past 18mths. Heightened China expectations risk being underwhelmed, but at the very least Beijing's policy posture has shifted dramatically. Officials are throwing all their weight behind underwriting the economy, meaningfully the clipping medium term risks for bulk commodities and AUD.

But even so, event risks this week suggest 0.6700 could be challenged for durability. Sept local employment (Thur) is due for a more moderate read after 5 strong gains totaling more than 200k, and in any case consensus has consistently over-estimated Sept for a number of years. If Q3 CPI (30 Oct) is more reassuring that would then open the door to a further dialing down of the RBA's hawkish rhetoric at their 5 Nov meeting. China's monthly batch of Sept. activity data+Q3 GDP likely underwhelm too, given recent soft credit and CPI/PPI trends.

All told, while the medium term positive AUD outlook has improved, it’s not the most ideal backdrop near term, the pair likely capped into 0.6765/75 early this week.- RF

USD – US data suggest a soft landing, rather than risk of a hard landing, but are not so firm as to suggest a “no-landing”. This mix supports Chair Powell’s gradual and cautious path for further easing and has been endorsed by other Fed officials. US earnings season picks up after Monday’s Columbus Day pause. Further solid earnings will support the return of US exceptionalism support for shares and higher yields and would likely push USD DXY into the 104’s. This week’s activity data are unlikely to unsettle the recent positive tone for US, though hurricane issues may be apparent in weekly Claims data. Geopolitical tensions, more information on Chinese support packages and the fast-approaching US election are key aspects for markets to monitor. The sharpness of the return of a firmer USD does bode some caution if momentum falters, though support is now likely in the 102.25-50 area.

EUR – Eurozone budget scrutiny is unlikely to trigger any existential risks for the region, but in combination with lower growth projections and rating agency raising concerns, EUR is facing more pronounced headwinds. ECB is now highly likely to ease 25bps in both this week and Dec., markets pricing -24bps for Thursday and then a cumulative -48bps into the December meeting, though data dependency and caution around Services CPI and wages growth are likely to be reiterated. Official Eurozone data is limited to Aug. Industrial Production and final Sept. CPI, but the Indeed Wage Tracker is due to be updated this week. However, USD appears to be in the driving seat for EUR/USD as US exceptionalism returns with US earnings of key interest. EUR/USD is potentially defining support ahead of the ECB meeting. A slip below 1.0900 risks a further flush to the 1.0800 area within a potential 1.08-1.11 range into month end.

JPY – PM Ishiba has made it clear that he will support the nascent economic recovery into Japan’s 27th October elections and intends to present a supportive budget should he win. Although BoJ may be cautious with respect to tightening in the near term, they have also endorsed their projections of economic recovery with an increased focus on the potential for wage growth into 2025 and Rengo negotiations. This week’s national Sept. CPI release may cause some gyrations, but officials have stressed concerns over volatility in financial markets, overtly mentioning excessive JPY easing, which suggests that USD/JPY rebounds will find more pronounced messages of official “concern” above 150.00 (risk of a spike to 152.00). The ensuring of growth potential into the elections also suggests the USD/JPY declines will be supported and so an effective 144-150 range may well develop.- TR

NZD -NZD/USD continues to consolidate in a 0.6050-0.6120 range, ahead of a possible downleg towards 0.5900 multi-week. The main influential factors are the USD strengthening as Fed easing expectations are pared, the US economy outperforms, and geopolitical risks rise. NZ-US yield spreads are now negative (the 2yr OIS spread is at -12bp), the RBNZ last week cutting the OCR by 50bp and saying nothing to dissuade markets from expecting another 50bp in November. NZ-AU yield spreads have also fallen significantly, but AUD/NZD has lagged the move. A catch-up would take the cross beyond 1.1150. NZ event this week comes from NZ CPI (Wed).– IS

Rates

US Rates: The UST market continues to re-calibrate policy expectations and trading ranges for maturities across the term structure. A 25bp rate cut in November is now ascribed an 80% likelihood as the market’s confidence in both the pace and size of the Fed’s near term rate cuts and the broader easing cycle have come under question. Friday’s data did not shift the dial in either direction. We have previously stated that this is likely to be the “state of play” for USTs for some weeks to come. There is little on the data front to shift expectations this week, although the regional surveys will, as usual, provide some timely new information.

Outright: We have been expecting a volatile, range-trade for some time. So the recent price action has not been surprising and we have anticipated the bearish overtone to price action that has left 10yr yields at 4.10% to begin the week, the highest level since late July. Our initial target remains 4.15% as we monitor price action and sentiment for signs that yields have reached a level where both tactical dip-buyers and strategic duration seekers are prepared to add risk. We expect that to be forthcoming if yields move to the 4.15-25% level.

Curve: The 2s10s curve bear-steepened a further 5bps on Friday to close at +15bp. We see little reason to expect that the general curve steepening trend is over, but would expect the trend to be supported more by bearish impulses than bullish drivers for now.

10yr Spread to Bund: The UST underperformance has pushed the spread wider, to 184bp. That is the widest it has been since early August and we have flagged that the 185-190bp region is now the next target. We think that can be easily achieved in coming days. – DM

AU Rates: The market’s RBA pricing is, in our view, more realistic than it was previously. There is now very little factored-in to the forward profile for the RBA until the February meeting, where a cut is ascribed an 85-90% chance. That is largely in line with our own forecast, although we see all the risks pointing to an even later start. This week’s labour data will be a crucial input to this assessment, given the RBA’s dual mandate.

Outright: 3yr bond futures remain above 96.20, which we see as good support, while 10yr prices have moved below 95.75 and are potentially in a new, lower price range. For now, we would be neutral frather than maintain shorts, as we expect that bonds are set for a consolidation phase, supported by similar price action in the US. The key market debate remains around just how much of a lag the RBA will have versus Fed policy combined with the global search for yield. The latter will act more medium term, with a “buy the dip” mentality serving to cap the extent of bearish corrections, such as the one we are currently in.

Curve: While the curve is expected to maintain a steepening bias, we also think that, in an unchanged policy environment, global yield-seeking behaviour will be a strong headwind limiting the size and pace of any steepening from current levels. We expect the 3s10s futures spread to remain around the 50bp on average over the medium term.

Swap Spreads: We would be slightly paid EFPs but do not expect a material shift either way. Swap spreads remain near their narrowest levels and while there has been heavy payside flow as a result of the inversion in the 3m BBSW-3yr spread, it has been overwhelmed by receive-side flows across the curve. That talks to the macro environment we are in and there is little reason under that scenario to expect the narrow spread trend to reverse anytime soon.

Semi Spreads: We continue to expect strong supply which will see spread narrowing impulses hard to sustain. Even so, given where we are in global yield cycles, any material corrections will continue to attract investor support.

10yr Spread to UST: Cross market spreads will relatively range-bound as the policy debate dominates. The benchmark AU-US 10yr bond spread will still likely widen on US rallies and narrow or be flat on selloffs, but remain under the recent wides of 25bps. We would rather enter narrowers at range highs and be square near the lows. – DM

NZD Rates - The RBNZ started its easing cycle in August, and accelerated it with a 50bp cut in October. Markets have priced a 100% chance of another 50bp cut in November, with the whole easing cycle expected to be worth around 250bp. While that suggests limited scope for further downside in swap rates, there is potential for the market to undershoot. 2yr swaps last week made a cycle low of 3.50%, and that level could be retested during the month ahead. NZ Q3 CPI data this week will be the main influence on pricing. Our economists (and the consensus) expect annual CPI inflation will be at 2.2%, slightly lower than the RBNZ’s forecast of 2.3%.

The 2-10yr swap curve remains at +38bp - the steepest since March 2022 (but looking stretched). Our NZ-AU 2-10yr steepener trade (entered in Feb at 90bp) is at -7bp, also quite stretched (hence our take profit stop is nearby at -20bp), although we wouldn’t rule out further gains multi-month given the RBNZ’s dovish stance.

NZGB i-spreads have fallen slightly from the record highs set last week, the 10yr at +33bp (from a peak of +40bp). Rising outright yields have helped the NZGB outperform over the past week, and these should continue to be influential during the next few weeks. On 7 November we get more fiscal news, being the government financial accounts for the first three months of FY25, and then on 17 December we get the HYEFU and NZGB issuance projections. - IS

Funding, basis, and liability management

Rates markets are still removing some of the more vigorous views of pricing, with US yields driving a change over the last week since the NFP and various Fed speakers. While US cash markets were closed overnight, the futures were open, and this saw a further removing of cuts to the US market. Higher oil prices are also reigniting some inflation concerns, though these are probably shorter lived.

In Australian markets, hedgers had a golden period a few weeks ago with stretched terminal rate pricing via short swaps and medium tenors, particularly with the sharpest inversion of the floating/fixed curve since the GFC. Much of this has been pared back , and if cuts are priced in from here, they would likely only be seen in the very short swap tenors. BBSW to the 3-year swap, in terms of a mid-rate is now down to 55bp from over 100bp when we advocated strongly to add hedges. The 1-year forward 3-year swap rate, which had been as low as 3.2%, which is our terminal rate expectation, is now at 3.755%.

In funding markets, BBSW/OIS has started to ease, thought the BBSW rates themselves, at least for the 6-month tenor is still quite high. OIS markets are still favouring pushing out the RBA’s rate cut cycle to May of 2025, having given up largely on the 2024 chances.

This presents depositors with opportunities, given 2-3 year TDs are around the 5% market and the curve thereafter, while lower, is not as steeply discounted as it would be once the cutting cycle starts.

Basis markets have seen excess A$ hold the front break lower, while terms curves are seeing two-way flow from issuance offshore, and a few decent Kangaroo clips in the last week. On Friday, TCV issued EUR200m of a 30-year deal, which has seen the 30-year Xccy basis swap at its least inverted level since 2022. With substantial cash flows coming from bond maturities and cash flows over coming weeks, we would expect the A$ funding markets to show excess cash via tighter BOB spreads, lower Xccy basis in short tenors and more inversion of the FX/OIS basis. So far this is happening, with the front break at -9.25bp and 3-month FX/OIS basis, which encompasses the turn, being at flat. Forward implied yields are reasonably static, with the 6-month tenor at 4.3%, which is more in line with how OIS is starting to move, and the first rate cut is pushing out towards the May meeting. -MW

Commodities

Crude:

It was a Washington Post Article that really broke the back of the crude markets. However, ahead of that there were a number of factors weighing on prices during the holiday shortened session. The WSJ ran a story suggesting that ‘Saudi Arabia may “open the spigot” due to “deteriorating cohesion” within OPEC’. The report cited work from Capital Economics suggesting that Saudi Arabia may look to ‘punish cheating producers’ and it’s a case of ‘when not if, Saudi Arabia opens the oil taps’. The FT also ran a story noting that cheap natural gas was spurring Chinese truckers to switch to rigs powered by gas contributing to a “catastrophic sales drop from the world’s largest [diesel] truck maker”. The piece went on to note that the switch had helped “thrust China past peak diesel demand and moved it closer to reaching peak oil”. China’s diesel use is forecast to fall 4% this year by CICC. The piece went on to note that natural gas trucks made up 42% of China’s heavy truck sales from January to August compared with just 9% in 2022. In addition, OPEC trimmed its forecast for the increase in Chinese demand to just 580kbpd this year, down from 650kbpd last month. Chinese imports of oil fell in September by 7.4% due to weak refining margins and seasonal maintenance. However, it was the WAPO story that Israel will strike military not nuclear or oil targets in Iran, that really contributed to that late sharp fall in crude prices, taking Brent below $75.00 for the first time in a week and a half. We had argued for a pop in crude into the $80-85 region as an opportunity to sell strength given the rising supply and waning demand pictures. It would take a further and aggressive deterioration in the Middle East conflict for that to happen, with energy infrastructure being directly targeted.

Metals:

We remain of the view that Copper should find something of a base in the $9,400/ $9,600 region as we await the slew of China data with IP and retail sales for September on Friday and GDP on the 18th. That should help us get an early understanding of how much impact stimulus to date is having on the Chinese economy. However, higher frequency data suggests that activity in China is only really stabilising at very weak levels rather than seeing the huge boost that markets are hoping for, hence the idea that we are probably set to push through that floor in the weeks ahead with the $9,300/ $9,500 level being seen over time. It’s also noteworthy that a large long in the October LME aluminium contract appears to have been culled. Bloomberg reported last month that Trafigura had amassed a huge long position in the October contract. However, LME open interest data suggests that this position has been run down, sending the October November spread plunging from a premium of $22 at the start of the month to a discount of $15.50 last night. All this despite press reports that Emirates Global Aluminium had sought clarity from customs authorities in Guinea earlier in the week after bauxite exports were halted. Bauxite is a key feedstock for alumina, and alumina prices in China have hit the highest level since contracts were launched in 2023.

Iron ore:

Chinese trade data confirmed the continuation of a trend we have seen pretty much all year. Chinese imports of iron ore remained well above 5yr average levels. China imported 104.13mt of iron ore in September, versus a 5yr average of 100.88mt. Now one could argue that is good news. We don’t, given that iron ore port inventory levels remain close to 2yr highs and steel production slumped through August and September. Now we will get data on this Friday, but our expectations are we will see something in the region of 73-76mt of steel produced in China in September versus a 5yr average of almost 84mt. So again, we don’t see much good news there. However, it’s important to note that Chinese steel exports surged again in September, hitting the highest level since mid-2016. To be sure, concerns about Chinese dumping of steel and steel product will continue rising. However, as long as this safety valve exists, it tends to shield steel producers from the worst of the slump in demand, allowing prices to hold above equilibrium levels. Bottom line, iron ore prices are set to hold above $100 and probably $105 in the near term, though it’s hard to see much upside beyond $110.

Gold:
Spun its wheels overnight but an overarching supportive trend remains in place, and with the Mideast geopolitical picture still very combustible - keeping a structural safe haven bid intact - gold can see higher levels near term. We still see $2750/$2850 area on a 1-3mth horizon.

Admittedly inflation-hedging demand is less likely to be a source of support as inflation stabilises nearer central bank targets, but global real interest rates are trending lower. In time we suspect the strong Sept US payrolls will prove to be an outlier to a softening trend and the Fed will remain on track to deliver 150bp in rate cuts by end-2025. Gold should find ongoing support around the $2605/oz area.- RF

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