FX

AUD – Friday's payrolls gave AUD/USD's low-key grind higher fresh legs: -23k vs +80k expected, -103k downward revisions and another fall in the household survey (-87k). AUD printed a new high for this run-up (0.7078) and starts a 6th week inside what is now a well-defined, moderately rising channel (≈US1.1c wide), the bulk of last week spent on its higher side.

Characteristic of this whole move: AUD/USD has not been the leader, it lacks a domestically sourced RBA/rates catalyst, and it lacks breadth on crosses. This rebound from 30 June looks nothing like the aggressive rallies of Jan and April, when AUD was marked US3-4c higher in a small window. But, metals have been trending higher and more recently gold is also participating. The USD is effectively being squeezed at both ends of the curve too, for distinct reasons. The front end is repricing lower (Sep FOMC to +11bp from last week's +17bp peak), with payrolls vindicating Warsh's hold. But the long end has been pricing a longer term regime shift: term premium measures (ACM, Kim) at/near multi-yr highs because the Fed's reaction function is in doubt and independence is once again being questioned. AUD/USD's support levels continue to lift, call it 0.7040 - the pre-payrolls level, followed by 0.7025.

1-3wks: Pushing up the expected range to 0.6950-0.7150 from 0.6900-0.7100, the persistence of the uptrend and the moderation in Fed hike risk mandate it. RBA is tricky for AUD this week: expect a hawkish message aimed in part at preventing markets from embracing end-of-cycle pricing, but forecasts likely tell a softer story: Q2 trimmed mean CPI 3.6% vs a 3.8% May SOMP, unemployment 4.4% vs a May 4.2% SOMP. Carried through the forecast horizon those revisions could see mid-2027 trimmed mean CPI sneak below 3% by mid-2027 vs their 3.1% May forecast. US CPI (Wed) also key, thugh a mild forecast skew to a higher than expected print around a 0.2% m/m core median creates room for a downside surprise.

3-12wks: Range 0.6830-0.7200. Fed. RBA. Iran. Friday's soft July payrolls restores conviction that Fed hike pricing is too aggressive (3m payrolls +20k avg, soft earnings and a household survey that has shed jobs almost every month in 2026 is almost impossible to deliver a hike into). And yet there is still around +40bp in Fed hikes to March 2027 priced, meaning there is still upside fuel for AUD. Hormuz remains a counterweight: Iran & Oman are reportedly "very close" to a transit-corridor deal, but genuine reopening is hostage to Iran demands for US concessions (blockade removal, sanctions relief and US force withdrawal). This is far from guaranteed and keeps an Iran/supply/growth shock on the table. The RBA leg is a neutral for AUD in this window, but we can see hawkish angst resuming into their Nov meeting, if Q3 trimmed mean CPI shows no conclusive disinflation after 2 straight 0.8% q/q prints. The net keeps AUD's uptrend intact, but vulnerable to Iran.

12wks+: target area 0.7250-0.7350. Structural positives intact - carry, clean fiscal metrics, commodity endowments in a world scrambling for them (copper on record highs) & AI/energy capex exposure. Revamped dedollarisation is another upside catalyst. We have been saying for a while that not all Trump shocks will land on the USD as bullishly as the Iran war. The Trump-Warsh dialogue story, and renewed attempts to remove Cook are exactly the kind of thing that keep questions about the USD's safe-haven hedge properties alive. Other candidates include likely Nov Midterm chaos. See a decent case for fresh 2026 highs through May's 0.7278 high.- RF

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

NZD/USD is threatening to break above the week-old range of 0.5860-0.5910. Should it do so, nearby targets are minor resistance at 0.5930 and major resistance at 0.6000. Much will hinge on the US CPI data on Wed. The NZ calendar is low key, apart from RBNZ inflation expectations (Thu), with the next major event the RBNZ MPS on 2 September. Looking further ahead, NZ-US yield spreads have preserved most of July’s OCR hike-related gains and are expected to extend higher during the quarter ahead given RBNZ vs Fed expectations. That should lend support to NZD/USD.

For the quarter ahead, we retain a neutral bias, pending an enduring resolution of the Iran war. A positive outcome could lift the NZD above the 0.6000 area, while a full-scale war could cause a decline to 0.5600.-IS

Rates

US Rates – Friday’s soft payrolls update saw some Fed rate hike premium unwound, steepening the curve slightly, with this week’s inflation data likely to be crucial to how the policy narrative and market sentiment evolve near term. Beyond that, of course, the impasse in the Gulf continues and oil prices still provide both the near and medium term directional backdrop for bonds. Beyond that, disenchantment with Warsh’s “big talk, no action” approach to policy will also remain a medium term narrative. The initial re-pricing on fears the Fed could fall behind the curve has largely run its course, but uncertainties about the Fed’s policy reaction function, arising out of no forward guidance, nor information around the key data and tools the Fed is likely to focus on, will not be resolved soon.

Outright: USTs are exhibiting skewed price action, with larger and more rapid moves higher in yield during period of high anxiety, and slower and more cautious rallies when better news is at hand. There have been a number of sentiment swings testing that proposition in recent weeks. One day there is hope that that one of Trump’s announcements around a successful end to the engagement might hold water, before the true reality of the situation gives the market pause. With each iteration of that now well established pattern, the UST response becomes more muted. So, the risks in our view remain skewed toward higher yields and we remain better sellers into rallies to, or through, 4.6% in10yr notes, especially as uncertainty around the US-Iran situation morphs into mid-term politics and economic growth while muted, remains resilient.

Curve: The curve steepened slightly following the labour data, however we would not expect a material shift to eventuate in either direction near term. Looking medium term, the mixture of inflation risks, term premia re-pricing and long term issuance trends will keep the curve steeper than it otherwise would have been in previous cycles.

10yr Spread to Bund: The spread has been pushing slowly higher but we see little reason for a major re-pricing to develop which would shift the spread to far from the 150bp level. - DM

AU Rates: Monetary policy is the key focus this week, with the RBA’s MPB meeting outcome, the Governor’s subsequent statement and press conference, the updated forecasts in the August Statement on Monetary Policy, and the Governor’s appearance before the House of Representatives Standing Committee on Economics all likely to attract keen attention and provide the basis and nuance for the evolving market narrative. Clearly there will be no change in policy, and the updated forecasts will acknowledge the recent trends in inflation and the labour market that support keeping the cash rate steady. However we suspect that the RBA’s messaging will remain hawkish and retain language around hiking again if necessary. That would be broadly in line with the current consensus, and be supportive of a base case an extended period of on hold while retaining the just over a 50% hike risk through 1Q27.

Outright: We see outright yields range-trading for the foreseeable future and with policy likely anchored, directional impetus will be as much driven by global events as domestic fundamentals. For now that places bearish risks on the longer end of the curve.

Curve: While there will be some minor re-calibration of the very front end this week, medium term curve shape will remain heavily influenced by offshore events, bear steepening and bull flattening. Any sustained normalisation in risk conditions should see global investor demand come back into focus. Yield enhancement trades will support a relatively flatter curve over the long term. The biggest risk to that view is a surge in global long end yields beyond the levels traded over recent months.

Swap Spreads: Spreads remain within their well-trodden ranges. While there will be some near term flow drivers, medium term, we expect both benchmark EFP spreads to remain relatively contained.

Semi Spreads: The GST distribution methodology is back on the agenda this week, with the Productivity Commission expected to release its interim report into the 2018 "no worse off" guarantee that has seen WA benefit significantly, and the Federal Budget dramatically worse off than expected. That will be a hot topic of discussion when the state and federal treasurers meet this week. While we will wait and see the detail of the interim report, to the extent that there is any material changes hinted at, the assumption would be that it would shift the status quo in favour of the other states and there will likely be some small shift in WATC’s relative pricing. We would emphasise, however, that the state’s finances would remain strong regardless of the ultimate outcome of the GST methodological review.

Beyond that near term focus, while there is some ongoing discussion around the evolving HQLA demand given risks to housing and balance sheet growth, we would not overstate the impact of those concerns on semi spreads. Indeed we see little reason to adjust our tactical and strategic advice that any material widening phase will be short-lived and should be faded.

10yr Spread to UST: We have taken profit on our long-held narrowing position but will reset at opportunity. That will likely come after a shift in the relative terminal rates has run its course, with a move back to the 40-45bp level likely to attract keen attention.-DM

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

The 2yr swap rate continues to consolidate inside the month-old range of 3.60%-3.80%, after making a cycle high of 3.81% in July. We expect that range to hold for the month ahead given the paucity of major NZ data ahead of the RBNZ MPS (2 Sep). The RBNZ’s inflation expectations survey on Thu will be worth watching though. OIS pricing remains stuck at a 90%-95% chance of a hike in September, but the chances of another in October have been trimmed to 50% (from 65% two weeks ago), with a total of two hikes by December. OIS pricing predicts an OCR of 3.50% in a year’s time, lower than our economists (who forecast hikes in September and December, an OCR of 3.75% in a year’s time, and a peak of 4.0%).

The yield curve’s flattening trend since the peak in late December remains stalled awaiting fresh RBNZ guidance, the 2-10yr swap at 75bp (vs 67bp cycle low). We expect the RBNZ’s tightening cycle to bear-flatten the curve further during the year ahead, but in the meantime, steepening in US and AU curves will spillover to NZ such that the 2-10yr could rise to the 80bp-90bp area. That could represent an opportunity to re-enter NZ flatteners.

The downward trend in NZGB 10yr i-spreads remains intact, albeit slowed, the 2036 at 31bp and at a cycle low, and the 2038 at 35bp (vs 38bp at issuance). Longer term, we expect further declines in i-spreads, partly driven by a continuing upward trend in swap rates.

Our received AU 5y5y swap vs NZ trade continues to perform (currently -41bp, entered at -58bp on 15 June, targeting around -30bp over a 12mth horizon, and stop-loss at entry). The RBNZ’s start to the tightening cycle in July has been the main driver, helped by benign AU inflation data. This week’s RBA decision and Friday’s Gov. Bullock testimony present event risk via AU pricing. The main medium term rationale is that NZ’s economy in 2026 and 2027 should indicate significant improvement from 2025. Longer term, this spread should be close to zero, reflecting relative long-run neutral rates.-IS

Funding, basis, and liability management

The Australian market moves into this week's RBA with a bias for a hawkish statement and a market view that no hike is forthcoming at the meeting due to the recent CPI and labour market data. Nonetheless, OIS is not budging far and has a fairly flat curve as far out as 3 years, sitting above 4%.

Term markets have not seen significant relief for corporate liability managers given that the global backdrop has been less amenable to a move down in the term structure. If indeed we are at the end of the RBA’s hiking cycle, the historic pattern is to see a steepening of the rates curve from 3s/10s or 5s/10s as the shorter tenors lead the way lower. To that end we recently published an idea to look a zero premium conditional bull steepener, which given vol moves is advantageous for those not wishing to spend premium.

In the cash market, solid Kangaroo supply continues to come to market, albeit in sub 5 year tenors, keeping that part of the curve better offered. Canadian names are likely to return to the market later this month or September and into the coupon season, which should ultimately pressure Xccy lower.
Offsetting this with any level of visibility would be a Semi issue in 10-15 years offshore, and the TCV 2042 domestic deal last week could set the Semi curve up for a better price guide in offshore markets. All that said, Xccy pay side flow would likely be a flow snapped up by Kangaroo issuers, possibly including the well hoped for hyperscaler names that have been tipped to issue as they diversify their global funding sources. In longer tenors, 5y5y has now slipped below 5bp. We opined several months ago that this structure would shift lower and the old ‘floor’ of 10bp would become the new cap. Recently we recommended that carry players, hedgers etc should target the 10y 5y BBSW/SOFR at 11.5bp (to receive) ahead of expected supply in September but also because Super funds may need to stretch out on the curve to find the high point for carry. -MW

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