FX

AUD – AUD acquitted itself well overnight despite multiple potential triggers (GBP political stress, JPY weakness, a stronger US core CPI, Iran hardening its position with 5 pre-conditions for resuming talks) and held > 0.7200. Short-term support is building there. A sharper risk-off impulse finds the next real level, 0.7100–0.7110. Notably, this is arguably the 1st session in >2mths not exclusively driven by US-Iran headlines! Retaining a constructive 1mth (0.7350) & 3mth (0.7450) AUD view, but noting that the macro picture is suddenly muddying: core US CPI 0.4% (partly a BLS shelter quirk, but still), alongside decent Apr payrolls, markets now pricing +20bp Fed hike risk by March 2027. If sustained, rate support for AUD compresses a little. Forecasters are pushing back Strait reopening timelines too. Australia is on the right side of the energy terms-of-trade shock, but global growth channels bear watching. Xi-Trump this week: stage managed, modest risk-friendly deliverables, likely on tariffs/chips/rare earths. Federal budget: not material for AUD.

1–2wks: AUD downside contained to 0.7150–0.7180; 0.7100 under a sharper risk-off impulse. At those levels markets are pricing genuine deal collapse, not posturing. Higher basing levels than any prior episode. 0.6985–0.7000 remains distant and abstract. Back-channels open, negotiations intact. The let's risk assets’ grind through a messy and non-linear path toward a "containment" scenario. Escalatory rhetoric is increasingly discounted as theatre within a coercive bargainin framework. Weaker local data, a less front-footed RBA are secondary. Global risk dynamics mostly are driving AUD here.

3-12wks: This horizon is where market patience and the real-economy damage are stress tested. Hard impasse + weak global data = AUD lower. Strait reopening = AUD ignores weak data entirely. Range: 0.7000–0.7500, mild bullish skew. Liberation Day analogy holds — initial relief, then grinding containment. We pencil in a wide 0.7000–0.7500 trading range across this window, with a mild bullish skew.

12wks+: At this horizon AUD structural bullishness is reinforced. 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 alngside Fed hikes, that undermines AUD yield support. -RF

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

NZD/USD has held above its range break level of 0.5930 over the past week, and as long as that remains the case, the 0.6050 area is targeted near term. War developments remain volatile but are at least not trending adversely. Local data releases this week hold some market interest: inflation expectations (today), and partial CPI (Fri). -IS

Rates

US Rates – Treasuries finished the overnight session sharply weaker with the 10-year yield hitting its highest level since July last year, and the 30-year yield crossing the eye-catching 5.00% level. The firmer headline and core CPI print combined with the recent strong payrolls print has seen Fed Rate hike expectations boosted to more than 40% by year-end. While we remain skewed towards higher yields in the medium term, the key directional impetus in the short term is expected to come from geo-politics and the ebb and flow of sentiment around Iran-US negotiations. Given that there remains much uncertainty around the timelines and outcomes of the US-Iran conflict, bond markets will maintain their high correlation with oil-prices.

Outright: We continue to view medium term risk rewards as skewed toward higher yields. 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 be increasing in line with an accelerated military spend relative to budget. The Treasury can only maintain T-Bill funding for a limited time. 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, along long term issuance trends, should manifest itself in a steeper curve over time.

10yr Spread to Bund: We see few reasons why the US should significantly outperform, so near term we expect the recent narrowing to reverse and the spread to remain above 130bp. –DM&UC

AU Rates – The FY27 Federal budget confirmed recent headlines of reforms to tax and spending measures including CGT, negative gearing and cuts to NDIS and infrastructure spending. The key question for markets remains whether it will add to the inflation impulse, especially as gross debt approaches the $1trn level over forward estimates. In our view, the budget does not imply a strong change to the RBA’s outlook in the near term. Governor Bullock’s comments that the three rate hikes delivered to date “gives space” for the MPB to see how the conflict in Western Asia plays out have reduced the chances of a June hike. There is currently around one-and-half 25bp rate cuts in the forward cash profile, so our forecast is largely in line with market expectations, although the timing of moves is up for debate. 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. We expect the RBA will continue to focus more on inflation risks over growth fears as it is imperative for inflation fears to remain well-anchored.

Outright: Based on Budget forecasts, the AOFM expects issuance of Treasury Bonds in 2026-27 to be around $125 billion. This is in line with the revised 2025-26 borrowing requirement of $120bn. So, the market will be absorbing around the same amount of supply each week which has been around the $2bn mark. While we do not think there will be a significant change to the AOFMs issuance strategy near term, the market has been discussing the prospects of a lower average tenor over time.

Beyond this, given that we expect domestic policy risks to remain hawkishly-skewed, we remain better sellers into strength. 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 days, 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: EFPs have pushed slightly wider after the AOFM’s updated borrowing requirement with payside positions likely being undertaken on the

expectation of lower issuance. Beyond this, we see EFPs as largely directional at the moment, with. 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: Of the major Semis issuers, we have now seen the Victorian and Western Australian budgets. While the latter continued the well-known positive fiscal themes, Victoria announced a larger borrowing programme and a budget that did little to address their fiscal repair imperative. At the time we wrote that this was “at best” neutral for TCV spreads, which remain the widest of all the key issuers. We continue to make that point but at the same time we do not expect spreads to widening dramatically either. One reason for that is the securing of $3.8bn in Commonwealth funding for the SRL East project. From the start, Victoria has asked the Feds for around $9-10bn for the project. Including the new announcement, there has been a total of $6bn of that granted. The real significance of this is that it follows on from Infrastructure Australia’s elevation of the project to its "highest priority" list. Previously, Infrastructure Australia was lukewarm on the project. So with that comes some confidence that there will be further Fed funding going forward, which should take away the worst-case scenario for TCV spreads - that the State would have to fund it all themselves. Of course the opposition has stated that they would pause construction and re-assess, which from a debt holders perspective would be an even better outcome.

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.

For the sector as a whole, we continue to believe that any material spread widening will be capped and any such moves should be viewed as an opportunity.

10yr Spread to UST: We have been noting that we are watching price action very closely with a view to entering narrowers and some small narrowing exposure has been recommended. We would not add to that position at present, however, given both the domestic policy risks and the renewed global risk aversion that is likely to surge. –DM&UC

NZ Rates - NZ 2yr swap 1 week outlook: higher; 3 months: higher. The NZ 2yr swap rate is threatening to break above its month-old 3.35%-3.63% range. That has mostly been led by offshore yields, but there is a sense that NZ inflationary pressures are likely to persist beyond any war de-escalation, which will keep market pricing for OCR hikes for 2027 meetings supported.

OIS pricing for near meetings has risen slightly over the past week, mostly responding to the continuation of the war and rising oil prices. There is currently a 50% chance of a May OCR hike (up from 30% a few days ago), and over a 100% chance by July. Almost four hikes are priced by year end, more aggressive than 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 74bp 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, and nudged lower this week in sympathy with rising yields. Yesterday’s government financials indicate that the issuance program announced at the 28 May Budget will not be materially different from HYEFU. The 2036 i-spread is currently at 35bp and we would be buyers on any bounces to 40bp. Possible 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. UST i-spreads are a risk. –IS

Funding, basis, and liability management.

The RBA’s rate hike last week was followed by slightly more tempered language, which sees pricing for June at around 5bp. Westpac changed the call (in a tweak) with August and September bringing hikes rather than June and August has previously held.

Whilst there was that change, we hold a paid June RBA vs received May RBNZ in meeting date OIS with 5bp on the AU side and (initially) 10bp for NZ, though that has drifted against us since Tuesday morning by a small margin.

Thus, from a purely risk/reward nature, June RBA OIS is too low in our view, and tactically is worth being paid, if not for the full period until the meeting, but for the interim as market pricing will ebb and flow. We hold this as a trade for our investor client base.

In terms of curves, we looked at 1month BBSW vs the 3 year tenor in a Wrap a week ago and noted again that should we see a drop in the outrights, this would be an opportune time for hedgers to look at their profile. We were cautious of ‘hoping’ for too much of a move, suggesting 15-20bp would be hard to come by, but perhaps ironically, the hike last week has seen the term curve lower, and the 1 year forward 3 year swap is now at a mid market level of 4.63%, from 4.8% at the start of the month, when we were firm that levels were unattractive to hedge.

Hedgers could try to finesse here and seek a sub 4.6% level, which was last seen as yields rose in March due to the war. At the same time, looking gift horses in the mouth is not a great strategy, so our call to action would be at least the consideration of hedges here for a percentage of a portfolio.

We have discussed the shape of the Xccy curve, being particularly flat in 5s/10s and the 5s/10s/15s fly. Our expectation of Canadian names tapping Australia was premature, but finally, we saw OMERS print in A$ this week which justifies the curve shape. Australian issuers (banks mostly) had issued offshore, and some recent corporate deals have followed, albeit in smaller size.

The recent spike in NZ FX/OIS basis has eased as the OMO size has been large enough to take out the squeeze for NZ$. It does remain relatively high, so needs ongoing support, perhaps coming from the large May coupons due shortly. -MW

Commodities

Crude:

Crude has been steadily pushing higher over the last few days as an agreement remains to be reached. The US reportedly released a record 1.22mb/d of crude last week to try mitigate the shock to oil prices. SPR inventories fell to around 384.1m with this SPR draw of 8.6m barrels topping the previous weekly record of 8.4m (Sept 2022). However its worth mentioning that IEA requires the US to hold at least 90 days of stock which implies that SPR inventory shouldn't fall below 250mb.

Saudi crude oil exports to China are also set to tank to around 13m-14m barrels in June and for reference Saudi on average exported around 40-50m barrels a month to China pre Gulf war.

These buffers of SPR releases and purchases of floating crude have prevented prices from running away for now - and we are seeing evidence in this from premiums for major North sea oil grades dropping recently to almost prewar levels. However we've been cautioning that the market almost seems to optimistic and when these buffers start to run out we see crude continuing to push higher again. If we see the Strait open, the immediate response would intuitively be a sharp drop in oil prices - but with the lag time in restarting operations, production will take months to normalise. Global inventory proxies are also dropping at an alarming rate - risk seems skewed to the upside here for prices. We see a base case of a move through the $110s into a stagflationary range of $120-$150/bbl however this would require that the Strait remain shut through May and June.

Metals:

Aluminium has pushed moderately higher since the onset of the war as the conflict has halted production at smelters in the Middle East. Auto industries alone have warned against rising commodity costs and LME Ali has been trading at a premium to SHF (almost 1.1x). However, Trump recently announced a process allowing individual steel and Ali producers in Canada and Mexico to request a lower Section 232 tariff in exchange for building/expanding production in the US. If approved, this would reduce the 50% tariff to 25% . While this may somewhat calm prices - we see room for a move higher towards $3600+ as even if the Strait reopens soon, smelters will take a while to restart operations.

Copper supplies remain tight and inventories in China are declining, meanwhile demand remains relatively strong. Lingering fears of Trump imposing a tariff on refined products has resulted in stockpiling in the US which has inturn drained inventories and at the same time we've seen supply disruptions in Chile and Indonesia. This combined with the rally in commodities as a whole on war-related headlines has seen copper pushing to near all-time highs above $14000. And we expect this has further to run so we remain bullish copper here.

Gold:

Gold has been fairly resilient pushing higher over the last week or so despite US-Iran back and forth, and is currently sitting just under its 50dma which likely reflects that markets are pricing in an eventual resolution. Should we see that delivered, prices could easily rally +$4800/oz nearing on $5000/oz.

Iron ore:

SGE Iron ore reached new highs not seen since July 2024 at $111.91/t this week. Improved demand across China's steel mills and overseas buyers has fed into the price surge. During Jan-April 2026, China's iron ore imports were up 8%y/y at 420mt - likely aligning with steel mills front running the crackdowns on steel production by China authorities. While strong near-term demand likely keeps prices elevated here, we don’t see a long-term structural bullish case. -KB

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