FX

AUD – Conviction levels are very low and its apparent in a range of volatility metrics - the VIX, MOVE and CVIX indices have all jumped from multi month lows in recent days. The backdrop here is the large and growing list of stories to process - unsettled politics and associated fiscal risks in Japan and France, escalating tensions in the bilateral US-China economic relationship over rare earths, tariffs and shipping fees, and not least the ongoing US Govt. shutdown.

AUD is understandably struggling to find its footing against this backdrop, but at the very least there's the clear dovish signal on rate cuts from Fed Chair Powell overnight. We also think that the sharp escalation in US-China tensions is more a case of "strategic posturing" ahead of a still more likely than not Trump-XI meeting on the APEC sidelines later this month. The US and China can't seem to get much past a very basic thaw/truce in relations, and the relationship is fragile that way. But we assume that both sides both sides eventually gravitate towards an off-ramp. Following through on the proposed shipping fees, rare Earth licensing restrictions and 100% tariffs are unsustainable from a supply chain and growth risk perspective.

Next week's Beijing plenum and the heavy focus on the 15th five-year plan might also be decisive. It's not clear that the CNY will receive much explicit attention but we wonder whether this blueprint will set a course for another strong push to internationalise the CNY (stronger offshore markets and expanded cross-border payments) and possibly even an an implicit long term CNY appreciation cycle - that would be consistent with what appears to be a more determined push to rebalance the economy.

Closer to home, rates markets have nudged the probability of an RBA rate cut over the Nov 2025-May 2025 window slightly higher around the global trade risks. But even in the event that there is a rate cut in November, we are not sure that this will fuel any meaningful AUD downside. The overarching takeaway is that the RBA will remain cautious and non-committal in terms of forward guidance, and in the event of a rate cut they will likely note that policy is increasingly approaching neutral. With all those considerations in mind, and with AUD/USD beginning to approach the outer reaches of a long term support zone - stretching from 0.6375 to 0.6420 - we are increasingly looking for opportunities to buy AUD. -RF

NZD - NZD/USD momentum remains negative amid choppy price action. Technically, a bearish six-month old neckline broke last week (at 0.5780), signalling potential to reach 0.5600. Fundamentally, the RBNZ MPR last week imparted a dovish tone to NZ interest rate markets. NZ OIS has fully priced a 25bp cut in November, but only 50% priced a final one for early next year. How markets resolve the latter will depend on the outcome of a busy domestic economic data calendar over the next few weeks, which includes Q3 CPI on 20 October and Q3 labour data on 5 November. We remain short from 8 October at 0.5748. -IS

Rates

US Rates – Ongoing US-China trade tensions, a somewhat dovish update from Fed Chair Powell, including raising the chances of a near term cease to QT have each validated current policy pricing and positive UST sentiment.

Outright: 10yr yields settled back above 4%, having briefly dipped below that level overnight. We should respect the price action and it feels increasingly likely that a sustained move lower will eventuate over coming weeks. However it is important to put such an eventuality in context. That is, a material breach of the 4% level would represent a major shift in thinking and an almost full reversal of the fears around inflation, issuance and the impact of “de-dollarisation” that peaked following the so-called Liberation Day. If it were to break, the question then would be how much lower they could go? That would probably depend on whether the market priced in a greater chance of recession than is already reflected in the forward cash profile. For now, though, a realistic target would be around 3.8%, although we do not think that level would sustain for long under the current more moderate growth expectation. So, we remain neutral at current levels, albeit closely watching price action for the trigger to establish strategic short positions.

Curve: The 2-10yr bond curves remains not far off average levels for the past six months. Even so, we favour being exposed to medium term steepeners, despite how much is factored-in for the Fed. The fiscal outlook, along with the potential dovish influence of Fed Governor Miran, continue to support steeper curves over the medium term.

10yr Spread to Bund: The spread is trading directionally, narrowing on UST rallies and vice versa. It is currently around 5bps off range lows, a test of which would also apply some resistance to any outright rally.– DM

AU Rates – The chance of a 25bp rate cut at the November RBA MPB meeting remain below 50%. Beyond that, a full rate cut is not factored-in until March and the odds of a further cut beyond that given odds of around 30%. That has been the case for some time now and the debate remains around whether either this week’s labour data, or the quarterly CPI at the end of the month, will contain sufficient information content to dramatically shift that pricing? Indeed, assessing the risk rewards around the data is difficult at present. That is, given current pared-back pricing, it would be natural to assume that risk rewards could be skewed to a larger reaction to dovish outcomes. However, at the same time there is an evolving view that the RBA might be on hold for the foreseeable future, especially if inflation is sticky. So, any confirmation of that would limited the extent of any domestic-driven rallies.

Outright: The rally in 3yr futures has pushed prices back into the previous 96.45-96.60 range, while 10yr futures are back at the middle of the 95.55 to 95.85 range that has prevailed since July. Given the global yield backdrop and the ongoing demand for A$ assets, a further push higher is likely in coming days.

Curve: We think the trend is in place for a further push slightly flatter in coming weeks as global investor demand comes back into focus. The next key target is for the 3s10s is the 70bp level.

Swap Spreads: EFPs have continued to edge wider, supported by the improved Federal budget position, the outright rally, the RBA pricing re-calibration, stopping out of speculative received positions and similar price action in global swap spreads. The latter will be of even greater near term influence given that 10yr US swap spreads widened by as much as 3bps on Powell’s QT comments. The question is whether EFPs can move back into positive territory? We are watching the price action closely but our central expectation is for EFPs to remain inverse on average over coming months. A sustained widening would need to be supported by an extended underlying bond market rally, which we do not think is likely, as least near term.

Semi Spreads: We continue to expect any widening impulses to be capped, with semis still having a significant yield advantage compared to global counterparts. We suspect the sector will continue to attract solid demand and that is reflected in the size of the books for A$ syndications of late. Semis are the better “cross market” trade for now and will benefit further from any bearish rates performance.

10yr Spread to UST: While cross market spreads are near recent wides, they have been informed by the shift in the relative policy trajectories in either country. Even so, we continue to monitor the spread and price action for signals to re-enter narrowing trades. –DM

SSAs: The A$ SSA market saw a flurry of small taps by issuers over last week, with KFW, Renten and KBN all tapping 5-8 year maturities. IFC has also come to market this week with a small tap of their 2033 line. AUD levels remain attractive for SSA issuers compared to their USD and Euro curves and this may see more opportunities for issuers to tap the market before year end. The supply has been met with strong demand, with the taps pricing at a comfortable margin through prevailing market mids. SSA spreads to swap and bond have stayed relatively rangebound across the curve despite the supply, with IFC performing to the other SSA names. We also note the heavy coupon month of October, which may see reinvestment flows add to the existing performance of recent syndications. Furthermore, 5-year SSA to Semi spreads remain at range-wide levels which should also draw demand in this area of the curve. -UC

NZ Rates - The downward trend in the NZ 2yr swap rate, which started in 2023, has extended to 2.51% today following lower global rates overnight. We see the path from here as skewed towards slightly lower, depending mostly on data outturns over the next few weeks. The OIS market has priced a 25bp cut in November as a 95% chance, and assigns a 50% chance to an additional cut by May 2026. Shifts in the latter will determine whether the 2yr swap rate falls below 2.50%.

Today we entered a new trade, receiving November OIS at 2.26%. Risk-reward is compelling: lose nothing if RBNZ cuts by 25bp (as we and most expect), but gain 26bp if it cuts by 50bp (which is plausible). The probability of a hold is near zero. A trade idea note with additional details will be published shortly.

The busy data calendar ahead of the MPS on 26 November includes CPI inflation and employment.

The NZ yield curve has receded slightly from the post-RBNZ MPR peak, the 2-10yr swap curve down from 111bp to 108bp. Whether the cycle high holds will depend on the OCR bottoming at 2.25%.

NZGB swap spreads have risen slightly during the past few days, probably responding to the attractive carry and roll provided by a very steep yield curve. The 2035 is at -49bp, from a range low of -53bp. The HYEFU in December may offer clues to the likelihood of fiscal consolidation, noting that the May 2026 Budget will precede the general election in Q4 2026.

The NZ-AU 1y1y swap spread is at a 13-year low at -77bp. It looks stretched technically and historically, but NZ data flow during the month ahead will be key to pricing in more (or less) easing. We have this on watch as a pay NZ receive AU trade. Longer maturities are also quite stretched. -IS

Funding, basis, and liability management.

Weekend news on renewed China trade tensions have meant that OIS markets in Australia started to factor in the idea of global risks playing into domestic policy response. This is what we discussed in Monday’s SVOAP as a risk, and that the 2025 dates would shift to price in a more evenly balanced chance of a cut. The move took place and is now at what we would see as fair value, though as of today, with heightened tensions ongoing, the most likely path is to price in a little more in terms of rate cut pricing. The term markets have moved as well, partially driven by the broader moves offshore.

For hedgers, the direction of rates moves have been helpful, but are limited in how far they have travelled, and remain a fair way from the levels we’d advocate strongly for. The directional moves have lifted vol, which may appeal for callable structures, but we would expect vol to start to ease back in coming days. The shift flatter in the forward rates curve is a help however, and this has been largely directional based, with the renewed bid in global debt also putting bond market curves flatter and yields lower. The slowdown in the US economy due to the government closure remains a narrative. Of note overnight, FOMC Char Powell discussed the idea of a slowdown in Fed balance sheet reduction. This richened bonds to swap and saw the largest one day move in over a year (outside the moves on Liberation Day). Balance sheet reduction, or QT, is a known element, but an earlier finish to this limits supply of USTs to the market and pressure on bank dealer balance sheets. Outside of regulatory reform, which we do not think takes place until 2026 (as regular readers would be aware), the other factors to consider come from supply side pressures or changes to issuance tenors, or a slip in demand within a broader de-dollarisation story.

Today gets the RBA’s Sarah Hunter speech and this will be followed by Governor Bullock on Thursday morning Sydney time. Of course, both of these speeches come prior to the labour market report, so will be limited in their meaning should this print surprise.

FX/OIS basis and front basis markets are quiet and rangebound and should remain so short term. For the hedgers, the flat shape of the curve has been a feature of late, though some slight bid to the 4-6 year area makes these tenors more attractive, and may also catch the eye of carry players. The 3s/5s/10s Xccy fly is a little elevated. We have no strong trade idea themes in these tenors as the market is well within recent ranges. In the ultras, the 10s/20s and 10s/30s basis curves have flattened, perhaps as previous flow has been cleared. There is no obvious structured product flow in the market right now and we’d also caution the flattening as being something that could turn quickly if a Semi issuer was to tap offshore. On that point, larger transactions would most likely come in 10-15 year tenors, while the 20-30 year would be the EUR or CHF private placements. SSAs and other Kangaroo borrowers can offset the 10-year point- today for example a Swedish corporate is printing a 10-year Kangaroo deal. However, the lack of natural receive flow in 20s/30s means the clearing of flow here can take longer to achieve. -MW

Commodities

Crude:

We remain of the view that the drop below $65 was the beginning of a price reset that will see Brent below $60. Why? Well OPEC released its Monthly Oil Market Report on Monday and confirmed a 630kbpd production increase in September, with OPEC 8 production rising by 1mbpd over the last 3 months and OPEC+ by 1.44mbpd. Over the last 6 months, OPEC+ production has risen by just over 2mbpd. The IEA released its MOMR last night and is now forecasting a 3mbpd rise in global crude production this year, up from 2.7mbpd and 2.4mbpd next year, up from 2.1mbpd. The IEA makes the potent point that demand is set to drop with refinery run rates set to hit a seasonal low in October, and the escalating attacks on Russian energy infrastructure cutting processing there by an estimated 500kbpd. Confirming this, Bloomberg noted that at least 28 attacks have been launched by Ukrainian drones on Russian oil refineries since August, and crude that hasn’t been processed as a result is likely being diverted for export via Russia’s Baltic and Black Sea ports. In the past 4 weeks, Russia crude shipments have hit a 28-month high due to the attacks.

So, we see as clear signs as possible that the current glut in crude markets is about to get a whole lot worse. And the only thing that has been stopping that from happening is strong Chinese demand to build inventory. However, that appears to be slowing with moves by the US to levy Chinese vessels and China to levy fees on US owned vessels arriving at its shores impacting perhaps as much as 15% of global crude capacity, then we could certainly see signs of a slowdown in Chinese demand. Now of course, the US is pushing hard for Europe to increase pressure on Russia, and the loss of Russian product may keep global product markets tight through the end of the year. However, we still see Brent sub $60 as we move through the end of the year.

Metals:

The almost unprecedented string of global copper mining outages in Indonesia, the DRC and both the El Teniente and Quebrada Blanca mines in Chile could impact circa 6% of global production with Morgan Stanley arguing that production will fall short of demand by a massive 590kt next year, the biggest deficit since 2004. We got a taste of what this might look like in Codelco’s August results. Codelco announced its lowest month of copper output in more than two decades after that July 31 fatal accident at the El Teniente mine, with total production of just 93.4Kt in August, down 25%yy while total Chilean production was down 10% to 419.8Kt! This is just the beginning of the story though and this should continue supporting copper prices in the near term round the $10,500 mark, though political issues in the US plus tariffs and trade wars should continue capping close to $11,000.

It's also noticeable that Chinese aluminium production and thus exports are showing increasing signs of plateauing as the sector hits against production caps at 45mt per year. The last 3 months has seen total Chinese production run very much at the cap, dragging yy production growth down. Given closure announcements in Mozambique and WA in recent weeks, global production is running at the slowest since the tail end of the pandemic. This argues for continued strength in aluminium prices in coming months and we are becoming more convinced that we will see prices above $3,000 as we move into next year.

Gold:

A sharp bout of what felt like profit taking in silver in Asian trade caused a sharp wobble in gold prices. However, while the US administration is talking about a way out from the current trade dispute with China, neither the US nor China are showing any signs of being the one to back down. And somebody has to back down here. In addition, Chinese ETF demand has remained super strong – with net buying in 10 of the last 10 trading days either side of Golden Week. Hence, we stick to the idea that dips in gold will be limited in the near term, with the potential for another push into the $4,200 to $4,400 region looking possible.

Iron ore:

China’s return from the Golden Week holiday has seen signs of restocking in iron ore, lifting prices back above $106. Adding to this, yesterday’s September iron ore imports were a staggering 116mt, a fresh all-time record high. Now part of the rise in demand could be explained by a tightening up of non-VAT export reporting for steel product. As of October 1, stricter enforcement of rules on non-VAT exports came into place, with exporters required to disclose the consignor’s identity and the export value, and failure to accurately report rendering the agent liable for tax on the declared amount. Certainly, steel product exports were close to the high for the year and steel production rose through August and early September suggesting there has been something of a rush to complete orders ahead of the reporting/ tax changes. However, we again note that iron ore imports into China in the last 3 months are up 9% versus the average over the last 5yrs while steel production is down by 9% on the same basis, with very little move in visible port inventory. In other words, China has been building vast official reserves of iron ore to act as a buffer in case of supply disruptions. However, given the huge rise in official iron ore reserves in recent months and first ore from Simandou just around the corner, we expect to see weaker prices into the end of the year. -RR

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