FX

AUD – AUD traded poorly Friday, along with all risk assets as USTs, bund and gilt yields hit new cycle highs, and it has traded lower still to start the week. The price action in March had been telling a more nuanced story. Each successive de-risking wave has found a higher low: 0.6944 (3 Mar), 0.6955 (9 Mar), 0.6980 (13 Mar), 0.7000 (19 Mar) — a staircase of support that has held even as global equity and credit indices have been printing fresh cycle lows and implied vols have continued to grind higher, particularly across EM FX and commodities. This of course speaks to a structural flow doing some real work, likely seasonal mining dividend flows, perhaps super fund hedging flows, alongside AUD's commodity export status, giving it a freer pass than peers. The caution has to be that: a) AUD can't afford to see any more weakness early this week, otherwise the pattern of higher lows is broken, and b) the bullish momentum across a range of AUD-crosses stalled last week, raising the question of whether the "structural bid" is sufficient to absorb a fresh shock.

The downside risks are non-trivial, but the compensating positives are equally asymmetric. We'll find out soon enough. Trump's 48-hour ultimatum for Iran to reopen the Strait of Hormuz — or face strikes on power infrastructure — expires 10:44AM Tuesday AEDT. Iran has signalled intent to retaliate against energy, IT and desalination assets across the region. We are plainly still in an escalation cycle, notwithstanding Trump's aside about "winding down." Brace for further vol spikes. This week's March flash PMIs (Tue/Wed) will deliver the first read on economic damage since the conflict began — outsized weakness could compound pressure on risk assets. Visibility on any endgame remains near-zero and the tails are thick. We acknowledge AUD could break the March staircase and test 0.6900; the longer the conflict runs, the greater the risk that energy supply disruption delivers a non-linear growth shock to Australia's Asia trade partners — through price, activity constraints and sentiment. That said, we think AUD ultimately outperforms its traditional risk beta: the energy-driven terms-of-trade boost is structural and real.

Zooming out, the conflict is acting as an accelerant on the USD's pre-existing structural impairment. Once conditions stabilise, long-horizon investors will likely accelerate USD-hedging and diversification programs. The channels are multiple: war-related supplemental spending pressures US term premia; foreign official investors are already selling USD assets to defend local currencies; and the conflict is accelerating geopolitical realignment toward multipolarity. The secular USD headwind is building.

We continue to call out super fund FX hedging flows too. FX has NOT been a diversifying asset for their global MSCI exposures in recent weeks - that lesson should increasingly be priced into behaviour. System-wide hedge ratios rose ~2ppts in Q4; and we estimate a further 3-6ppt increase in Q1, driven by the deteriorating AUD-MSCI correlation structure, higher AUD vol, and negative forward points that now annualise to nearly 1% accruing to AUD longs. We see hedge ratios rising at least 10ppts across 2026, implying ~A$100bn in net new AUD demand — a flow large enough to matter structurally.

For now, AUD remains a buy into the very low-0.69s, while AUD/NZD remains one of the safer long-AUD expressions given NZ's higher energy vulnerability. We will be watching this week's Global PMIs, China Industrial Profits, U.Michigan survey and EA Consumer Confidence - in all cases the first releases after US/Iran conflict started. -RF

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

The NZD remains under downward pressure amid continuation of the Iran war. The 0.5800 area has provided support during the past week, and that remains the case for the week ahead, but it does remain vulnerable. Should it break, we’d be targeting 0.5710 near term. As is the case for most asset classes, the NZD exchange rate is hostage to developments in the Iran war and oil prices. NZ’s fragile economic recovery risks being derailed if the war continues for an extended period.

This week’s key NZ events will be the speech from RBNZ Governor Breman on Tuesday, where she will discuss the impact of the war, and a speech by RBNZ Chief Economist Conway on Wednesday. There’s also monthly ANZ consumer confidence, which could reflect early reactions to the war.

For the quarter ahead, we maintain a cautious and mild bullish outlook. The 0.61 area could be revisited if the Iran war de-escalates within the next few weeks, because the NZ economy is in early recovery mode and the RBNZ is expected to hike the OCR by year end. The main risk to this view is that the war is extended to several months or longer, in which case NZD/USD would likely continue to decline below 0.57.-IS

Rates

US Rates – Global bond and rates markets remain heavily leveraged to oil prices as extreme pessimism about the Iranian situation accelerates. Fears of further damage to energy infrastructure arising from trump’s 48hr (now 24hr) ultimatum will keep markets on edge as we start the week. Inflation fears have escalated such that Fed pricing has now shifted from rate cuts to a chance of hikes. While that move probably reflects risk unwinds more than a serious re-calibration of the Fed risks, it is nonetheless representative of the difficulties inherent in the current situation for both market participants and policy makers alike. With news reports of further US troops being moved into the region, it is difficult to predict improved price action anytime soon.

Outright: While the market is currently focusing on the inflation impacts of the surge in oil prices, the longer the current situation persists, the more the narrative will shift to fears around global growth. That would completely reverse policy pricing, but it is too early to fade the recent moves. Indeed, even if the narrative were to change more quickly than we expect, fears of stagflation will, in any case, not be significantly supportive of longer maturities. While we wait in hope for sanity to prevail, hope is not a helpful strategy in markets. So there is little reason to expect the broader direction for interest rates to reverse. There may be periods of consolidation, as occurred at times over the past fortnight, but we continue to assess medium term risk rewards as skewed toward higher yields and we remain better sellers into rallies and would maintain short duration.

Curve: The curve has flattened as Fed rate cut pricing has been significantly re-calibrated. Should the re-pricing continue there will be further flattening to come. However, to the extent that the market has now fully re-calibrated the Fed risks and pricing, the curve calculus should shift. That is, the mixture of near term inflation risks and medium term growth concerns, along with the issuance implications of higher military spending, should manifest itself in a steeper curve over time.

10yr Spread to Bund: The spread printed a new near term low of 126bp earlier in the week but is now back inside the previous 130-140bp range. We do not expect a major re-calibration of this key relativity. - DM

AU Rates – We interpreted last week’s RBA hike and messaging as quite hawkish and the market clearly agrees. More than three more rate hikes are now factored-in to the forward cash curve by December. While some of that pricing may not be fully representative of the broader market consensus, but rather positioning related, and could be pared back slightly, there is little reason to expect sentiment to reverse meaningfully in coming days. Wednesday’s February CPI is unlikely to shift the message behind last week’s hike and fears around inflation expectations and Thursday’s speech by the RBA’s Christopher Kent, Assistant Governor (Financial Markets) is perhaps a more likely candidate for new domestic-related information.

Outright: Yields across the term structure have broken out to their highest levels since 2011. That is perhaps not surprising considering the terminal pricing for the RBA is now just below 5%. Despite this major re-pricing, given the global risks, we will remain better sellers into strength for now. Even so, we expect that an RBA that maintains its inflation-fighting credibility (something the market was worried about until last week’s move) will provide a headwind to any ongoing yield rises. Each successive rate hike will see longer tenor yields capped and eventually even move lower. However, the projected hikes have not been delivered yet and the inflation aspects of the oil shock will remain the dominant directional thematic for now, which prohibits us from a more bullish outlook.

Curve: We have been recommending curve flattening exposure for some time, and, despite the recent shift, see little reason to alter our view. Perhaps there will be some paring back given how much is priced-in for the RBA, but aside from periodic re-calibrations of policy pricing, curve drivers still favour flattening impulses, in our view, if only on a relative basis to other market. Any 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.

Swap Spreads: Swap EFPs are largely outright directional at present. So higher yields are producing narrower spreads and vice versa. Beyond that, at the long end, more sustainable supportive flows for 10yr EFP compression will rely on drivers such as AU-US 5y5y narrowers and 5y5y outright attracting receive-side demand. However, those flows are not likely to become dominant any time soon. For now we expect both benchmark EFP spreads to remain within recent ranges.

Semi Spreads: Semis have been exhibiting volatile price action as global credit concerns wax and wane but overall their performance toward the end of last week was very positive as they outperformed. That is a good signal that the buying on dips will continue medium term. The outright yield is attractive, and supported by the ongoing RV attraction versus global credit that has been in place for some. So we continue to believe that spread widening will be capped and should be viewed as an opportunity. One caution, however, would be that, if we are entering a significant “VAR” event, it could push some funded accounts to cut positions. In that case, short- and mid-curve semis are likely to be vulnerable.

10yr Spread to UST: At some stage yield enhancement considerations will resume as an important determinant than relative policy consideration. That time is not now, given the geo-political backdrop, however the RBA hike, along with current relative pricing, makes it much closer to attracting narrowing flows than if the RBA had declined to hike last week. Indeed, we are watching price action very closely with a view to entering narrowers. - DM

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

The NZ 2yr swap rate continues to surge higher, now up by 60bp to 3.54% since the Iran war started, largely following offshore rates market responses to the war, and more recently some other central bank signals on their possible response (mostly hawkish). While we believe the NZ short-end market’s response is overdone – we don’t expect the RBNZ to hike in response to higher oil prices, but rather to remain stimulatory to aid the economic recovery – we stand aside given yield momentum remains strong (albeit getting technically stretched).

OIS pricing for the July meeting has surged to 100%, with around three hikes in total priced by year end. RBNZ Governor Breman’s speech on 24 March will be an important determinant of extension or reversal of the move.

The 2-10yr yield curve has flattened from the 120bp peak in December to 86bp currently. We have long advocated flatteners in anticipation of the RBNZ’s tightening cycle, which we expect to start in December. Cognisant of high carry costs associated with a 2-10yr, we hold a less risky (lower volatility and carry) flattener – a 2-5-10yr swap fly (entered 12 Dec at +17bp, target -5bp, current +16bp).

LGFA on Friday announced an offering of May 2034 bonds could occur, subject to market conditions. Further details will be provided this week. We estimate a fair value i-spread to be around +70bp. LGFA last issued a new bond in October 2024. – IS

Funding, basis, and liability management

A backdrop last week of the RBA rate hike, which had not been fully priced in, was augmented by a swift turnaround in OIS pricing in the UK, Europe, NZ, Canada and USA. The RBA has its own special issues to consider, but a backdrop of an energy crisis becomes a much more challenging one for markets.

Australian bond yields have topped 5% in 10s, still the highest in the G10, but last week saw a significant move for all markets. Swaps are largely going with this, and with the risk that carry trades are taken off, payside swap flow to protect/hedge moves could also be a factor to consider.

Liability managers who are hedged are now seeing yields at the highest end of the range since 2011, so in the money hedges are looking attractive to consider removing some protection, if the view that there are only 1-2 more rate hikes coming, and that the market has fully priced, or almost fully priced the expected policy path. But, should conditions require it, a hike past the previous cycle high can’t be ruled out and that would almost certainly take yields further. After that, the question becomes one of the period of time policy stays on hold. For now, as above, the momentum is higher on inflationary risks rather than downside in growth.

For now, the yield curve is flattening, but is not inverting in the forwards, and for the liability managers, a situation where there is some relief to add hedges via the forwards will be the next item to watch. Hedges added here and not that much value given the current pricing. The longer that market rates stay high, however, means that hedges start to shorten and this leaves a little less protection. There are some small anomalies in the curve that might provide opportunities for more active market players to look to exploit.

BBSW has of course seen the rises that means the floating rate risk holders are seeing higher sets. The inversion of floating to fixed, which we highlighted actively in the first half of 2025 are a long way away, and even with a few more policy rate rises possibly flattening this curve, the fixed rate leg is at a much high level with a 4 in front rather than the 3 we saw last year.

In the Xccy basis market, a recent note covers off broader thoughts on the larger structural forces driving basis, including Super fund hedging, leveraged carry players, Kangaroo issuers and of course corporates and banks issuing offshore. Recent deals saw 10 year Xccy basis slightly better paid in the last week or so, with Melbourne and Sydney airports issuing 10 year deals in EUR and US$ respectively, while Westpac went to the CHF market, albeit in smaller size. In the Wrap last Tuesday, we discussed the levels of Canadian Provvies and their absence from the Kangaroo market this year. These borrowers can do A$1bn minimum and might use the upcoming ACGB maturity to find liquidity in high grade. Global credit markets are clearly open, but perhaps still fragile, and that may delay any of the foreign issuers tapping into the A$ demand.

After stabilising, USD swap spreads took a hit on Friday night and are lower across the board. This is not helpful for Aust/NZ issuers tapping the USD market. While bonds remain brittle, even at the higher yield structure, spreads could keep coming in.

The week ahead has Australian CPI, and speeches from the RBA’s Brad Jones and Chris Kent. -MW

Commodities

Crude:

The ebb and flow of headlines continue, dragging Brent inexorably higher towards $120 and beyond. On Friday afternoon in late NY trade, Trump was reported to be considering “winding down” US military efforts against Iran. On Saturday evening around 7:45pm EDT, he was warning that “If Iran doesn't FULLY OPEN, WITHOUT THREAT, the Strait of Hormuz, within 48 HOURS from this exact point in time, the United States of America will hit and obliterate their various POWER PLANTS, STARTING WITH THE BIGGEST ONE FIRST!".

Iran replied on Sunday that critical infrastructure and energy facilities in the Middle East could be “irreversibly destroyed” should Iranian power plants be attacked. In addition, Reuters reported that “2,500 Marines, along with the USS Boxer, an amphibious assault ship, and accompanying warships would deploy to the region” with press speculating that Trump was considering taking Kharg island. Also over the weekend, Iran fired missiles at the UK/US military base on the Chagos Islands, roughly 4,000km away, emphasising that even after 3 weeks of intense bombing and missile attacks, it still has the ability to hit targets much further away than previously thought.

Hence, given we are now in week 3 of the US Iran war, with no signs that we are any closer to deescalation, we expect to see energy prices pushing higher. As we noted last week, the impact of the Israeli attack on the South Pars field and Iranian attack on the Qatari Ras Laffan Industrial City has significantly added to lost energy and petrochemical production. QatarEnergy CEO told Reuters that the attack has knocked out 17% of Qatar’s LNG export capacity for a staggering “three to five years”. That will remove 12.8mtpa from the global LNG market, while exports of LPG will also fall 13%, helium by 14% and naphtha and sulphur will both drop by 6%. In addition to the acute damage at Ras Laffan, we have seen the Shaybah oil field and Ras Tanura refinery in Saudi Arabia hit, fires at the Mina Al-Ahmadi and the Mina Abdullah refineries in Kuwait, and the Shah gas field in UAE all impacted by drone attacks and fires.

Now the US administration has gone all in to try to damp down energy prices, with Bessent announcing over the weekend it had waived sanctions on Iranian oil purchases at sea for 30 days to ease surging oil prices driven by the US-Israeli war on Iran. He estimated that would bring about 140m barrels of oil to global markets and help relieve pressure on energy supply. Now Reuters reported that Indian refiners were looking to buy Iranian crude, though it will take some time to work out payment terms. It’s worth noting that our measure of crude in floating storge has dropped by circa 140mb in the last 3 weeks, emphasising how quickly this supply has already been drawn down.

However, at the same time, the first release of the US SPR saw only 45mb of crude awarded versus 86mb offered emphasising that the largest ever globally coordinated SPR release will likely fall short of the 400 total given that demand to borrow crude in the US (which is 43% of the total) appears to be limited.

We stick to the view that with hits to oil fields/ refineries/ gas plants happening daily, Brent is set to remain in a higher $105-$120 range near term. However, were we to see further escalation here (direct attacks on energy infrastructure/ boots on the ground), then we will move into a new higher $125-150 range. With that in mind, the WSJ reported that Saudi Arabia has a base case that prices could soar past $180 if the current disruptions persist until late April.

Metals:

We have been arguing for copper to challenge the lower end of the current $12,500 to $13,500 range for many weeks now, so we are not surprised by the almost 7% slump last week to below $12,000. However, we tend to see this correction starting to find support into the $11-$12,000 region. Adding a little bit of weight to that view, ShFE copper inventory dropped noticeably last week suggesting Chinese buyers will return when the price drops back into the levels we were looking at in Q4 last year.

Indian press is reporting that fuel shortages are seeing aluminium extrusion plants shutter, with the shortage of LPG cited as a “serious issue”. The Business Standard noted that 25 extrusion plants have shuttered operations completely, while nearly 200 others are running at sharply reduced rates, bringing total industry output down from around 70,000t per month to nearly 45,000t. Obviously this manifests itself as a reduction of primary aluminium, and our measure of global aluminium inventory is at the highest level for the year. However, the IAI reported that global aluminium production fell 0.4%mm in February to be up just +0.9%yy, with March data set to be even worse with S32 (nameplate capacity 580ktpa) placed into care and maintenance, Aluminium Bahrain confirmed on a production shutdown, Qatalum on a controlled shutdown of output. Hence, we tend to see the $3,000/ $3,200 range acting as good support here.

Gold:

We have been arguing for a washout back towards the $4,500 to $4,750 region as a key risk. Hence, we are not surprised by the continued slump. However, with all key near term supports broken, we can certainly extend down towards the 200dma.

Iron ore:

Despite Chinese port inventory holding close to record levels, Jan and Feb Chinese imports hitting seasonal records, the continued stoush between China MinRes and BHP plus concerns that potential diesel shortage in Australia may impact production levels, and hence supply, are all supporting iron ore pruices. In addition, the strike ballot for the Electrical Trade Union at BHP in the Pilbara closes mid this week. While this covers just 60 workers, and any action would likely involve targeted stoppages, it does emphasise further risks to supply here. Hence iron ore can remain close to $110, even if we don’t expect this to last and see further weakness in prices into the low $90s in the months ahead. - RR

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