FX

AUD – AUD/USD was repeatedly capped into 0.7085/95 last week and it carved out a succession of lower intraday lows — culminating in a Friday dip to 0.7015. But the cluster of short term supports in the low-0.7000s have been doing their job, and the pair never showed any inclination to meaningfully break lower. We read this as a constructive base-building phase ahead of an eventual break through 0.7095, which would then open the door to a retest of the recent 0.7147 highs.

There are a good amount of expiries just above 0.7100 in the near term, which probably means gridlock for AUD/USD, but at the same time we are approaching mining dividend season, and announcements so far point to modestly more AUD-demand than last year. Then there's the wider macro picture - a structurally resilient CNY. with Beijing's fixes clearly sanctioning ongoing gains, the growing prospect of a lift in superfund FX-equity hedge ratios, ongoing US to RoW equity rotation/rebalancing, and a hawkish RBA, collectively making for very robust set of supportive pillars. We are targeting the 0.7250/0.7300 area 1mth, and the risks are asymmetrically skewed to higher levels.

The key tail risk for AUD right now is geopolitical. The prediction markets are pricing better a than even chance of a strike on Iran by March 31, and a round of de-risking could bring the 0.6900 area into play. We would treat such a move as a buying opportunity. A strike, if it comes at all, is likely limited and short in duration, consistent with current US force posture, historical precedent, and approaching mid-terms.

Friday's news including a weaker advance Q4 US GDP print and the striking down of the IEEPA tariffs (temporarily replaced by a baseline 15% tariff), underscore the message that the USD remains structurally impaired. According to the Yale Budget Lab the effective US tariff rate has come down to 13.7% from 16%, but at the same time US policy uncertainty is surely elevated. Abstracting from the US Govt. shutdown Q4 GDP still shows a fragile a two-tiered K-shaped economy, driven primarily by AI-investment and household consumption of essential services. Our read of the deep pocketed long term pension fund community is that there is still strong inclination to sell USD rallies. "Value and diversification" is the geographic asset allocation mantra among the global pension investment community, This process will be slow and gradual, though we note that World MSCI-ex US continues to build on last year's outperformance into mid-Feb.

The case for higher superannuation FX hedge ratios continues to firm. AUD/USD's appeal as a natural portfolio hedge rested on its sell-off reliability during equity stress ("Type A") risk-off, That remains intact. What is changing is the growing frequency of "Type B" episodes — Trump-induced, US-specific stress events where the USD no longer functions as a safe haven. This is gradually eroding AUD's historically high tail-dependence hedge properties. The numbers are striking: the probability of AUD/USD falling during the worst 5% of S&P 500 outcomes has dropped to around 50% under the Trump era — essentially a coin toss — compared to 80% pre-Trump. The sample is admittedly short, only 15 months and contains relatively few genuine stress episodes, but the direction of travel is clear. The bottom line is that AUD/USD has become materially less likely to co-crash with US equities in a stress scenario, and we expect this to persist as long as the Administration continues to chip away at US institutional credibility and upend long-standing assumptions about the rules-based global order.-RF

NZD- NZD/USD 1 week outlook: neutral; 3 month outlook: higher. NZD/USD continues to consolidate in the 0.5928 to 0.6093 range which has prevailed since peaking on 29 January. Further consolidation this week is expected, with a test of 0.6000 possible.

Economic data this week is second-tier for both NZ and the US. Still worth watching will be NZ retail sales and the monthly business and consumer sentiment surveys, while the US has PPI inflation data. Probably more important for markets will be developments in US import tariffs, the Supreme Court’s ruling they were illegal, and fresh 10% global tariffs promised by President Trump. Also important will be developments in the US-Iran relationship given the military buildup, a US strike clearly NZD-negative in the near term.

Multi-month, we remain bullish, and target 0.62. NZ economic data is expected to trend positively during the year ahead as the economy recovers, and local interest rates are expected to gradually rise. In addition, the US dollar’s safe-haven identity has likely been tarnished given events over the past year, and there is potential for further Fed easing.-IS

Rates

US Rates – While there is only limited first tier data on the schedule this week, there are still plenty of risk events with market-moving potential. The ongoing implications of the Supreme Court’s tariff decision will remain front and centre, Iran-US tensions will be closely monitored, while there is also a plethora of Fedspeak. Some of the latter will need to address the risk to growth and inflation around the new 15% Section 122 tariffs, as well as the upside surprise to core PCE last Friday. From a bond market perspective, the loss of government revenue, which the non-partisan CFRB estimates at $2trn of 10yrs, all else equal, will raise some supply concerns. At the same time, Fed market pricing has been relatively stable over the past week, with just over 2 cuts factored-in by year end. That has anchored yields across the curve, with both 2yr and 10yr yields trading significantly narrow ranges than exhibited in previous weeks.

Outright: 10yr yields remain just above their lowest level since early December and in the middle of a 4.0 - 4.17% range at 4.08%. Both range extremes represent strong technical levels and we would expect them to hold this week, as there is no obvious “weak side” to the range. That is, Fedspeak will probably consolidate current expectations rather than shift them dramatically. There could be some slightly hawkish commentary given the core PCE surprise and the messaging from last week’s FOMC Minutes, but we would not expect it to be sufficient to shift valuations dramatically. On the bullish end of the spectrum, safe haven buying would be the strongest influence on price action, which, depending on the scale of the event, could open the way to a breach of 4% and the potential to revisit the strong support around the low 3.90% area.

Curve: Medium term, we remain exposed to steepeners, driven by more medium term factors such as a more dovish Fed, ongoing large debt supply amid fiscal concerns and the slow erosion in the USTs status as a low risk safe haven. We wouldn’t, however, have much risk on it this week.

10yr Spread to Bund: The spread has been moving broadly sideways but the US has slightly underperformed in recent sessions. We expect the lows seen last December to hold and for the 130-140bp range to hold near term.

AU Rates – This week’s monthly CPI will be the main market focus, along with a number of opportunities to hear from senior RBA officials, including Governor Bullock. Markets brought forward some rate hike risk following last week’s labour report but remain priced for around 1 and a half rate hikes by year end. That is an appropriate representation of the risks in our view, although we would see skewed risk rewards around the inflation outcome. A stronger than expected number could keep the market questioning whether the RBA could accelerate its hike cycle. Westpac sees the next hike in May, but March would remain within the markets range of options if inflation fears rise.

Outright: Despite the RBA’s gradual approach to policy and the market’s cautious approach to forward cash curve re-calibration, we still expect price action to be vulnerable to stronger data and more hawkish outcomes in coming weeks, while still taking its main directional impetus from UST price action. Even so, there will be good buying on dips supported by current cross market valuations.

Curve: After a long period in the second half of 2025 in which the 3-10yr curve moved broadly sideways within a narrow range, the curve has flattened by more than 30bps since the RBA’s hawkish pivot in December. We see more risks towards the short end driving further flattening, given recalibrated RBA rate hike risks. Aside from policy pricing, however, we think curve drivers still favour flattening impulses, as supply slows and global investor demand comes back into focus. A range-trading outright will encourage yield enhancement trades and that supports a flatter curve over the long term.

So what would be a realistic target for the 3-10yr bond curve? Our modelling suggests that current curve shape appropriately reflects policy pricing and other curve drivers. So any significant flattening will need to be driven by a renewed policy impulse. While that is not our forecast, it is where we see the balance of risks, So look for the curve to slowly maintain a flattening bias.

Swap Spreads: While the recent widening in EFPs has slowed, swap spreads remain near the upper end of recent ranges. At the 3yr maturity, the market will be very responsive to the prospects for even more hikes than are currently factored-in, keeping them near recent wides. While at the long end, supportive flows for 10yr EFP compression will rely on drivers such as AU-US 5y5y narrowers and 5y5y outright continuing to attract more receive-side demand.

Semi Spreads: Semis continue to attract demand and absorb supply relatively well. Global investors continue to see merit in domestic spread products to express cross market trades. That of course is supported by the central RV attraction versus global credit that has been in place for some.

10yr Spread to UST: There may not be a large subscription to narrowers anytime soon, but at some stage yield enhancement considerations will be a larger determinant than relative policy consideration. That time is not now. -DM

NZD Rates- NZ 2yr swap 1 week: lower; 3 months: neutral. The NZ 2yr swap rate rose from 2.44% in October to a cycle high of 3.17% in early February, and since then has corrected lower to 2.90%, partly in sympathy with US rates, and more recently in response to the market-dovish RBNZ MPS last week. The latter was less hawkish than markets had expected, emphasising a long period on hold will be required to aid the economic recovery. There is scope for the 2yr to fall further to the 2.80% area during the month ahead. But during the year ahead, assuming the NZ recovery does continue, rates will trend higher.

The OIS market prices 0% chance of a rate change at the next meeting on 8 April, but has a 55% chance of a hike by October 2026, and over 100% for December.

The 2-10yr yield curve had flattened from 120bp in December to 103bp pre-MPS, but the dovish surprise has caused a steepening to 109bp with a risk of more to come near term. During the year ahead, though, we expect curve flattening to be the dominant trend, as markets embrace the looming tightening cycle. Timing is critical, though, with carry and roll on a 2-10yr costing around 3.5bp per month. We hold a “soft” (less volatile and lower carry) flattener – a 2-5-10yr swap fly (entered 12 Dec at +17bp, target -5bp, current +8bp).

The trend decline in NZGB i-spreads (since the record high in April 2025) has stalled recently, with the 2036 at 35bp. A break below 30bp will probably require either higher outright rates (probably medium term), positive NZGB supply news (unlikely before the May Budget), or declines in UST i-spreads (uncertain). By year end, assuming our predictions of outright rates and NZGB supply prove correct, a 10yr i-spread of 15bp-20bp is plausible.-IS

Funding, basis, and liability management

Domestic economic data in Australia remains firm, as the jobs data lasty week showed. This week is more substantial, with the key release of Jan CPI data for Wednesday, and CAPEX Thursday. Beyond this, RBA speeches from Mick Plub, and Governor Bullock on Tuesday and Wednesday respectively will give us more insight into current thinking and developing themes.

For liability managers, the modest decline in term rates last week didn’t quite hit the level we’d be keen to accumulate hedges, and the floating to fixed rate curve we looked at last week, is flatter, but again still at relatively steep levels.

It would take a decent miss on the CPI print to put the market in a more favourable position, but playing for the 50/50 risk is not an ideal strategy. 1 year forward 3 year swap is midding around 4.36% at the moment, which remains in the top decile of recent years and thus suggests hedges are expensive. This is around 100bp higher than where we sat last year when we advocated strongly for hedges. Our data suggests corporates did take advantage of these lower yields to add hedges, but as always, rolling off of old deals and new deals coming on simply put the levels at less attractive rates.

The Xccy basis curve has the slight inversion out to 1 year BBSW/SOFR in spot and the short dated forwards, while the term structure remains better offered in spot. The high point on the curve sits in the 7-8 year tenor, presumably where there is some assumption of bank/ corporate deals going offshore, or perhaps a Semi issue. - MW

Commodities

Crude:

The combination of the potential for a “limited military strike on Iran to force it to meet [Trump’s] demands for a nuclear deal” and the ongoing tightness in crude markets due to supply disruptions in Kazakhstan, Venezuela and the US, plus India phasing out Russian oil have all helped to lift Brent to 7-month highs above $72. Our measure of global crude inventory has fallen to the lowest since September last year and is down by almost 100mb in the last 6 weeks pointing to an aggressive tightening in markets. So, if we do see the Iranian situation turn ‘hot’ from here, a push up to $75/76 certainly appears possible.

Now, we remain sceptical that we are set for an imminent attack, given that the third round of negotiations will take place in Geneva on Thursday, the IAEA may be present at those talks, we are now in Ramadan and comments from the US Ambassador to Isreal aired Friday will not have helped regional support for an attack. Hence, we still think this is Trump piling on the pressure rather than about to pull the trigger. But the NYT describes Thursday’s talks as “last-ditch talks” suggesting that Iran will have to come up with further concessions here in the days ahead.

We also see prices capped by rising supply. The Tengiz ramp up should be more noticeable in flows from this week given guidance that the week of 23rd Feb was the target for return to full production. Venezuelan numbers should also be improving too noting comments from US energy secretary Chris Wright that Venezuela can bolster crude production by 30% to 40% (300k to 400kbpd) this year. This weekend we also have an OPEC8 meeting noting a recent Bloomberg report that “some OPEC+ members see scope for the alliance to resume supply increases in April, believing concerns of a glut in global oil markets to be overblown”.

Hence, we stick to the view that the April Brent contract is capped by this $70/72 region unless we see US attacks, while solid support should remain in the $64-66 region as long as tension remains in the middle east. We still expect Brent to eventually slide back into the low $60s as we move through H1 this year and rising global production starts to weigh on prices, though that is a story for Q2 and beyond.

Metals:

We continue emphasising that global copper inventory is surging as demand wanes due to extreme prices and copper hoarding continues in the US. Global copper inventory has surged above 1mt for the first time since 2003. While Comex copper inventory is at record highs, ShFE is at 1 ½ year highs and LME is at 1-year highs. Hence, the inventory story appears to be swinging away from US hoarding to waning global demand, especially in China. Hence, we remain of the view copper is stuck in a $12,500 to $13,500 range.

USTR Greer confirmed last week that changes are afoot on steel and aluminium tariffs, though he did note that tariffs have been “very successful” and “they’re going to stay in place”. Greer noted that “we’ve heard stories of companies that have had to hire extra people for compliance. We’re not trying to have people do so much bean counting there not running their company correctly”. Bloomberg reported that “Administration officials have been working to narrow the scope of duties”. The ‘new scope’ may thus see a shift to a minimum aluminium content or a defined HTS code-based tariff application. Indeed, the Mid West premium has continued ticking higher, having jumped to more than discount the impact of the tariff, implying that buyers are willing to pay up to meet last minute requirements. In addition, the massive Mozal refinery (nameplate capacity 580ktpa) will “definitely” be placed into care and maintenance from March after the current power contract expires according to S32. That will be a big hit of say 0.8% of global production but 1.5 to 2% of seaborne trade. With Chinese production capped, that is important and aluminium supportive. Hence, until we get further tariff details, we appear stuck in a $3,000 to $3,200 range.

Gold:

China returns from LNY tomorrow, so it makes sense that gold is testing 3-week highs. However, China moved to clamp down on “illegal trading activity” in gold trading hubs in Shenzhen just before the start of the LNY holiday, so we don’t expect to see a rush of activity on the return. Rather, we expect to see gold remain in something like a $4,750 to $5,250 range near term, with geopolitical risks/ tariff chaos supporting. However, we still expect to see further gains over the medium term, and target $5,400 by end Q1, $5,600 by Q2 and $5,800 by year end.

Iron ore:

We are not at all surprised to see prices lurching lower to 8-month lows. Port inventory has surged to fresh seasonal record highs, and Kpler recently noted that inventory is “close to capacity”. Wires confirmed the arrival of the second shipment from Simandou last week, with blending operations beginning to match steelmakers technical requirements, emphasising the gradual ramp up of West African supply into China, with Baowu Resources distributing the new ore through its logistics networks. We expect to see further weakness in prices into the low $90s in the months ahead.- RR

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