FX

AUD – Up to this point realised & implied vols have been almost completely unpeturbed as Trump has gone back on the offensive and the daily tariff tally has grown. Weekend letters to the EU and Mexico announcing 25% tariffs from 1 August however have been met with a mild opening reset lower for currencies. Notably, letters have now been sent to 3 of the US' 4 largest trade partners: 30% on the EU & Mexico, 35% on Canada Friday (ex-USMCA compliant products), 50% on copper & Brazil, and 25% on Japan & Sth Korea. The Administration is reportedly also looking into doubling the baseline 10% tariff for partners that do not receive a letter too.

The latest tariff threats will be mostly seen as a negotiation tactic than a genuine left tail risk, but there is a non-negligible risk that this does not pan out so well, at a time when implied vols have fallen sharply and equities are at their highs. That, combined with renewed threats to Fed independence, suggests markets may start rebuilding precautionary USD shorts to start the week and restoring a risk premium on the USD.

We still see plenty of merit sticking patiently with core multi week AUD longs looking for an eventual break of 0.6600. We eye higher targets in the 0.6700-0.6800 area multi-wk too in light of the material policy shifts underway in China too. AUD is much better placed to handle tariff volatility than Liberation Day. For one thing, the RBA has aggressively staked out a cautious and predictable rate cut tempo around quarterly CPI releases.

Expectations are growing for China to take a more coordinated and active policy response to tackle deflation and protracted weakness in property markets too. Onshore property stock indices jumped 10%+ last week on local reports that the development of shanty-town areas might resume. This follows recent reports that the PBOC has been seeking learnings from European institutions on the fallout from ultra-low rates. An "anti-involution" campaign is gaining momentum too, after President Xi chaired a Central Financial and Economic Affairs Commission

meeting that tabled the potential for significant structural reforms, opening the door to addressing excess over-capacity, excess competition, and lifting support for consumption. If a policy shift is developing upcoming Politburo, State Council and NDRC meetings will offer clues.

Trump's OMB Director Voight sending a letter to Chair Powell alleging gross mismanagement. While the claim lacks merit, the caution is that it could nevertheless open a potential legal pathway to a push for Powell's "just cause" removal. US CPI & China June activity data (Tue) and local jobs (Thur) headline this week's calendars.- RF

NZD - NZD/USD remains in a three-month old ascending range, with boundaries currently at around 0.5900 and 0.6120. Within the range, minor support at around 0.6000 is holding for now but it does look vulnerable. The latest round of tariff notifications by the US on trading partners has caused risk sentiment to weaken, but only slightly, and this is weighing (slightly) on risk-sensitive currencies like the NZD.

The key event this week for the pair will be the US CPI data on Tuesday. NZ data is second-tier this week, but next week we have the important Q2 CPI release. Multi-month, we expect NZD/USD to remain in its moderately bullish range between 0.6000-0.6200. The main rationale is that the US dollar appears to be overvalued, and debate over its standing as the world’s reserve currency is unlikely to dissipate soon. – IS

Rates

US Rates – USTs yields traded a relatively narrow range over the week, with 10yr yields contained between 4.32% and 4.43%, and 2yr yields between 3.83% and 3.91%. Longer yields were under the most pressure, finishing near the week’s highs, as the curve slightly bear steepened. While the market absorbed supply relatively well, the escalation in the trade war ahead of 1 August dominated price action into the close and that is expected to be the major driver this week. Fed pricing has also been pared back, with the market taking around 17bps out of the 2025 forward cash profile over the week. To the extent that tariff discussions will again focus attention on inflation risks, it will make the Fed’s path to renewed rate cuts more challenging. That should see USTs continue to trade heavily near term.

Outright: We continue to define the medium term 10yr yield range as 4.00- 4.75%, averaging around the 4.5% area. That areas should be tested this week, while we also remain confident that there will be another push even higher in yield over coming weeks. The trigger may well be the renewed focus on inflationary impacts of the trade war, or perhaps when the UST supply begins to ramp up due to Trump’s massive fiscal spend, both combined with the nascent de-dollarisation trend.

Curve: We have been discussing, recommending and holding medium-term curve steepeners for some time. While the 2-10yr curve moved 7bps higher this week, to the steepest level since May, we continue to expect an eventual move back toward the 65-75bp level over time.

10yr Spread to Bund: The spread has corrected off the lows, as we expected. We would target a further 5-10bps widening but expect the spread to be well contained within the 160-200bp range for now. – DM

AU Rates –The market is continuing to come to terms with the implications of the “on hold” decision from the RBA at its July MPB meeting. For us, the main message is that the RBA will maintain a “cautious and predictable” pace for its easing cycle, with the quarterly SMP forecasts paramount in its decision-making framework. A quarterly pace of rate cuts, beginning in August and taking the cash target to a neutral level should be the market’s central case should current economic conditions prevail. In addition, the market should not expect any messaging around pricing to be delivered through the media or other channels, as the post-Review MPB’s decisions cannot be pre-empted.

Outright: The post-RBA 15bp selloff in the 3-year contract and 10bp selloff in the 10-year contract has largely been consolidated but looks vulnerable to extending further, especially if USTs continue to trade heavily. We remain sellers into strength at the long end and buyers of dips at the short end. We also continue to caution around periodic surges in volatility which means we would not assign much risk to outright positions for the time being.

Curve: As in the US, we continue to expect the curve to push steeper over the medium term, led by the long end, moreso than a re-pricing of RBA risks. Even so, the “steady as she goes” messaging from the RBA supports the narrative the domestic curve having a smaller beta with global curve moves, as does the relative fiscal positions and hence issuance burden. That is, the AU curve can undergoing a relative flattening to other markets.

Swap Spreads: As expected, EFPs have begun to test the lower bound of ranges (-5bp to -15bp for 10yr EFP). Indeed, the question is whether an new narrowing impulse to new levels can be achieved as early as this week. It has been our view for some time that the increased pace of ACGB issues will eventually push 10yr EFP toward -20bp and, while there has been some profit-related payside, we would favour holding received EFP positions at current levels.

Semi Spreads: Despite a good amount of issuance to begin the financial year, semi-bond spreads remain near the narrower end of their ranges. That is clearly a strong positive performance and in line with our understanding of current demand conditions. While concerns around fiscal deficits, and hence ongoing supply, will provide a headwind to further spread narrowing, equally important is the relatively high yields offered and the consistent buying evident on any pullbacks. The combination will exert and maintain a range-trading rhythm to price action.

10yr Spread to UST: AU bonds have underperformed on a relative basis to the US given the market reaction to the RBA pause. However, we expect this to be short-lived and have largely run its course, supported by the fact that Australia remains less correlated to US outcomes than in the past. That narrative should only be reinforced by the renewed focus on tariffs and the re-calibration of what a UST actually stands for. We expect the spread to remain in negative territory on average and continue to recommend fading any material widening. That suggests that current levels are providing a medium term opportunity. – DM

SSAs: SSA issuers have taken advantage of the recent tightening in spreads over the past week through a flurry of deals. The end of last week saw two domestic deals priced – the IFC A$ 2030 social bond tap and the IBRD New NZ$ 7-year Issue. Notably, the IBRD issue is the first SSA Kauri deal since the NIB NZ$600m 5YR in January last year. Given the success of the recent NZGB May-31 syndication and support from XCCY basis levels, it was no surprise the book had attracted diverse investor participation and priced tighter than initial guidance. Strong Euro, GBP and USD issuance from SSA issuers including the EU, KfW, IADB and IBRD were also received well by investors last week. Issuance is set to slow over the summer season in the next couple of weeks, which may present further opportunity for tightening spreads. We have previously commented on USD SSA names grinding tighter to treasuries over the recent month. This trend remains, and we will watch for even further spread performance as UST supply begins to respond to the Trump administration’s massive fiscal spend. - UC

Funding, basis, and liability management.

RBA pricing is reflecting the step back seen last week and the later 2025 dates into 2026 have removed a little more of the cut profile. The terminal rate is significantly higher now that the RBA has signalled a more measured approach to the easing cycle, albeit they have made it clear Australia is in one. For liability managers, the cost of money in the forward swap market has lifted quite notably. The 1 year forward 3 year swap is now above 3.5% as a mid-market rate, having lifted around 20bp from the recent lows.

As we regularly note, from a liability manger perspective, we have had a fairly consistent view of taking opportunities as they present themselves. That is to say, when the forward rates curve is tight to the projected terminal rate, the value in hedging increases sharply.

BBSW/SOFR is back on the radar, the front break having traded from a fairly negative position in recent weeks to a +3/4bp level. The term curve of basis is sitting higher in spot, while the forward curve like 5y5y basis continues a slow edging lower. It sits around 12.5bp, from the 14bp a few weeks back. It is not from the lows seen back in January, which was a period of hefty Kangaroo flow and hedge activity as global equities rallied. On the Kangaroo front, while there was a deal last week, the consistency of the flow is limited and should start to slow in the weeks ahead. As August reporting season approaches, we will be on the lookout for borrowers taking to the offshore market and that may include the larger syndicated deals from Semis, should conditions and pricing warrant it.-MW

Commodities

Crude:

Trump’s “major statement” on Russia will set the tone for crude for the next 24hrs and probably the next week or so. Trump told NBC that he expects the Senate to pass Lindsey Graham’s “very major and biting sanctions bill” and that he’ll “have a major statement to make on Russia on Monday”. Senator Graham told Face the Nation that “this is truly a sledgehammer available to President Trump to end this war”. According to the official Lindsey Graham website, “the [Sanctioning Russia Act of 2025] also imposes a 500 percent tariff on imported goods from countries that buy Russian oil, gas, uranium and other products”. Now according to the IEA, roughly 50% of Russia’s exports of crude and condensate went to China over the 2021 to 2024 period while 36% went to India, noting that the US stopped importing Russian energy products in April 2022. In addition, about a third of Russian LNG went to Europe in 2023.

Now clearly, if Russia does not “engage in good faith negotiations for a lasting peace”, the threat of 500% secondary tariffs on China and India etc, would have a sudden and significant impact on Russia’s ability to export oil, gas, uranium and other products. It could also have a significant impact on energy prices too, which is something that Trump does not want or like. Thus, this sledgehammer is not really ‘designed to be used’ – rather it’s meant to be kept behind the glass and only used if Russia does not come to the table. However, the threat of its use will likely keep traders on their toes and Brent testing the early $70s.

However, OPEC will release its MOMR on Tuesday, including June production levels from ‘secondary sources’ for OPEC+. Now Saudi appears to be very sensitive around the definition of ‘oil production’ following a report from the IEA that it had increased production by 700bpd to 9.8mbpd. The IEA also noted that “recent months have seen a significant slowdown in oil demand, especially in developing countries”. Bloomberg reported that Saudi Arabia “is asking the companies that OPEC uses for independent analysis of oil-production levels to submit a lower figure for the kingdom’s June output”, noting that the IEA was dropped as a secondary source used by OPEC in 2022. It remains to be seen what impact the above has on this week’s data reported by OPEC, but it certainly suggests that the return of OPEC 8 barrels accelerated in June.

As we have noted many times over recent weeks, assuming the OPEC 8 agree to another 546kbpd increase at the next meeting on August 3, that will mean that 2.46mb will have been returned over a 6-month period, equating to the 2.2mb that was curtailed in November 2023 plus a 0.4mb increase for the UAE. We are already just beginning to see signs that global crude inventory is beginning to rise at a time when it is normally slumping. Given the slow steady ramp up of OPEC 8 barrels, we think this process continues. Thus, we think that the inventory picture tends to cap gains, though Trump’s “major statement” will be the key driver at least in the very near term.

Metals:

The Comex/ LME copper spread closed out last week at just above 27%, which means the market is sitting somewhere between no copper tariff and 50% copper tariff. Now we fully expect to see 50% copper tariffs. However, a number of market commentators that we rate highly make the point that there is no way that Trump will place 50% tariffs on copper and put the US manufacturing sector even further “behind the eight ball”.

Hence there are a number of key questions here. Firstly, will we see copper tariffs and will they be at 50% or lower if US industry lobbyists do their work in Washington. Secondly, will they be just on processed metal as in the case of the aluminium tariff or copper and copper products including scrap? Thirdly, we don’t know when the tariff will kick in. Now, Bloomberg reported that Trump’s copper tariff will begin on August 1 and that they will include refined copper as well as semi-finished products quoting a “person familiar with the matter who asked not to be identified” because the plans haven’t yet been formalised.

Now, Comex copper prices should remain supported in the very near term as every spare ton of copper that can be sourced will be being put on a boat bound for the US right now. Comex copper inventory continues exploding right now as that copper shows up in warehouses, with the ratio of unwarranted to warranted rising noticeably suggesting that this is copper that is being stockpiled for industrial use rather than delivery versus futures.

However, at the same time, on warrant copper stocks (and unwarranted) are also showing up in LME warehouses and both the tom/next and spot to 3m spreads have pushed further into negative territory pointing to weak physical demand. We have been arguing for many months now that once we know what the copper tariff is, we want to sell LME copper, and eventually Comex too. Clearly, we are getting closer to that point.

Gold:

With Trump’s ‘big, beautiful bill’ now law, the Fed under another political spotlight and Trump handing out a fresh waves of tariff threats, we remain of the view that we will see an eventual test of the $3,400 level that has capped gains over the last 2 ½ months. However, ETF flows have clearly slowed, and early indications of central bank demand would suggest the same in June too. On top of that, spec gold positioning did not rise nearly as much as we expected over the recent Iranian attacks. Thus, the risks of a correction down to and possibly below $3,200 are definitely rising.

Iron Ore:

No change in our iron ore views. At the risk of being completely wrong here, we view rumours of a Central Urban Work Conference meeting as soon as this week as spurious. That Conference last met in December 2015, and ushered in a massive policy stimulus focussed on government backed housing driving a massive construction boom in China. Little wonder property stocks surged yesterday last week, driving the Shanghai Property Index to a fresh high for the year. However, President Xi has been showing clearer signs of taking action on overcapacity in industries including solar panels, EVs, cement and steel. Creating another property boom would fly in the face of that crackdown on overcapacity and inefficient use of resources. Hence, we doubt there is anything behind this. However, we will be watching very closely, and we note the Politburo meeting likely comes this week or next and rumours ahead of it will be worth watching. Meanwhile, steel export and iron ore import data for June will be reported today and steel production data tomorrow. CISA data suggests the weakness seen in April and May’s steel production continued in June. And given rumours of notices being received by steel mills in the Shanxi province mandating production cuts of as much as 6mt of crude steel this year, we just don’t see iron ore prices sustaining close to $100 much longer and fully expect a drop below $90 and beyond in time. – RR

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