FX

AUD - With AUD stalling into 0.6650 range highs 3 days in a row and the RBA not quite living up to more hawkish expectations the immediate case for AUD upside right here is not compelling. USD/JPY and USD/CNH appear to have found short term floors too. That said, AUD setbacks likely extend no further than 0.6550 for now. AUD/USD can still bank on a more supportive yield spread floor, with the RBA nevertheless adopting a more hawkish and determined posture, while Powell appears to have an asymmetric easing bias, declining to entertain rate hikes last week and repeatedly emphasising the need for more time, meaningfully narrowing the distribution of risks for US rates. AUD/EUR and AUD/NZD are a slightly different story and could see deeper pullbacks, especially with the AUD/NZD cross already exhibiting signs of fatigue around 1.10.

USD – Less evident US economic exceptionalism and a return to pricing in more evident FOMC easing into year-end reduces scope for prior potential moves towards 107.75. USD could even be vulnerable to flushed to reaffirm range support in the 103.90-00, though Fedspeak in coming days could contain the downside, their messaging unlikely to be as restrained and cautious as Chair Powell's last week. US PPI/CPI the next key updates next week.

EUR – Powell's push back on a potential hawkish pivot gained more traction with markets after the more modest NFP/employment data and the lower services ISM. The end of April also provided evidence that conditions within the Eurozone are altering too, the economy now recovering from its mild recession and inflation pressures are not abating along the path that ECB hawks would like. The ECB’s less unified expectations of easing continuing after an initial June rate cut has already underscored support for EUR. Rather than threaten support ahead of 1.0600, the week closed with a brief push above 1.0800 and suggests that EUR is likely to be within a more solid 1.06-1.09 range as markets await further data to affirm the apparent shifting tones seen early May.

JPY – USD/JPY looks to have found a floor in the 152/53 zone for the time being. Even with a cautious Powell and less evident US exceptionalism the dynamics of underlying US resiliency remain and so USD/JPY is still expected to regain an upwards trend, but it may face interim hurdles now in the 155.00 area and the mid 158’s.

CNH – The case for USD/CNH trading materially below USD/CNY multi-day was never compelling and with USD/JPY finding a floor in the 152-153 region its not a great surprise to see USD/CNH rebounding. USD/CNH likely ranges between 7.20-7.25 near term, but topside risks remain, with Chinese officials keeping the door wide open to rate cuts and the focus in coming months turning towards the US election and Trump's tariff and China decoupling policies.- RF&TR

NZD - NZD/USD has stalled in the low 0.60s, but we retain a bullish near-term bias, targeting 0.6085 multi-day. There’s little major data from either the US or NZ this week, so yield spreads – a major driver – should be relatively stable. The next major NZ event will be the RBNZ MPS on 22 May, markets likely to focus on any shift in the OCR track. AUD/NZD looks more interesting near term, with a reversal from the low 1.10s possibly unfolding, 1.0850 a plausible multi-week target. AU-NZ yield spreads are likely to weigh on the cross in the wake of the RBA’s unchanged stance. - IS

Rates

US Rates – With few catalysts, the bullish shift in sentiment and directional momentum that was triggered by Powell ruling out rate hikes last week has continued, even given the 3yr auction overnight and a large slate of corporate IG issuance. 10yr yields are now at their lowest level in a month. The question now is whether the “higher for longer” Fed narrative is sufficient to extend the rally materially further. In our view the message of patience from the Fed combined will see longer maturities continue to trade within the well-established range. There will certainly be volatility within the range, but the prospects of a upside breach of the yield range and a push toward 5% have been greatly diminished. The market will continue to focus on rate cut risks at the front end, which will anchor longer maturities. So we would expect a broad 3 month trading range for 10yr yields of 4.25-4.75%. Price action suggests maintaining a “buy on dips” approach as it is clear that investors are back seeking yield ahead of the easing cycle. - DM

AU Rates - Prior to yesterday’s RBA decision we had been cautioning about the risk that, relative to market expectations, the RBA’s message would not be hawkish enough. There were some “lottery ticket” short positions which would be squeezed but there was also scope for the RBA to provide a more balanced assessment of economic conditions than those calling for higher rates. The post-decision price action certainly reflected those risks. While the Governor’s Statement conceded that “inflation remains high and is falling more gradually than expected” and that the RBA “will remain vigilant to upside risks”, there was no change to the central message of “not ruling anything in or out”. That is the same “bias” articulated in March, so from the RBA’s perspective the message for markets is “unchanged for longer”. Certainly that is how we assess the risks to our November rate cut forecast.

In the immediate aftermath of the announcement yields across the term structure fell 6-8bps, with the curve bull steepening. We would expect those gains to be sustained and for the curve to continue a steepening impulse over coming weeks, with a 3-10yr futures spread target of around 45bps. With the risk of an imminent rate hike out of the way, and the market back to assessing the high frequency data on domestic demand, the global economy, inflation and labour, there is also scope for the recent underperformance of AU rates and fixed income markets to reverse. Indeed, the AU-US 10yr bond spread has narrowed around 5bps on the day.

Yesterday Victoria kicked off the state budget season. Ahead of the release we had been optimistic/hopeful that the budget might have been a "sell the rumour, buy the fact" event but that was certainly not the case, with gross issuance being larger than the market had expected. Please refer to our VIC Budget Summary for an in-depth review of the budget. This was always seen as the budget that would define the near term pricing for the sector as a whole, and that, combined with the relativities offered at the moment by the Canadian provinces AUD deals, is problematic for Semi-bond and swap-spreads at the moment. Medium term, there is little confidence that cost blowouts have been reined in (refer the chart on infrastructure labour shortages in the aforementioned piece), so investors have every incentive to sit back and wait for all the budgets to come through before assessing clearing price and investor demand. -DM

NZ Rates - The NZ 2yr swap rate has rolled over from the April peak of 5.20%, catalysed by the FOMC and NZ jobs data. We see potential for downward momentum to continue, targeting 4.80% during the weeks ahead. Market pricing of an 80% chance of a cut in October is more dovish than our economists’ forecast of Feb 2025, but there’s little data ahead of the 22 May RBNZ MPS. The 2-10yr swap curve has flattened slightly during the past few days, offshore led - any further movement to the -50bp area would present an attractive steepener entry possibility.

NZGBs have continued to outperform swaps, the 10yr point remaining in demand. Yesterday’s Government’s financial statement to 31 March – the last update before the 30 May annual Budget – showed further modest deterioration in corporate tax revenue. We continue to forecast a $2bn increase in the 2025/26 NZGB programme. – IS

Funding, basis and liability management

Despite some punchy and excitable commentary ahead of the RBA meeting, driven by a handful of commentators, the RBA held the line on policy, but did give the warning of debating a rate hike. It was good enough as a relief valve for markets, and fits to the broader picture that our Chief Economist Luci Ellis has discussed for some time. Moreover, as we have wrote here in SVOAP a week ago, markets had leaned far over their skis, and the risk was becoming skewed to lower yields. As such we suggested corporates who had hedged and were in the money looked at ways of ‘banking’ some of this, with option trades to lock in a potential move lower.

None of this means risks are over for borrowers. The RBA’s warning suggests that the tolerance for higher inflation is very limited. But near term at least, we would expect the 3-year quarterly swap rate to invert a little further to BBSW (the floating fixed rate spread) as will also be seen in the 1 month vs 2 year swap which is trading at flat (on a mid-market basis).

US yields also continue to track lower in the background, with some curve flattening in recent days.

FX/OIS for 1-6 month tenors are easing, while BOB spreads are also tighter. The general direction of travel for both of these is a narrowing. But hedgers who are looking at BOB coverage should be watching for dips in the market to enter spreads. Spot BBSW is still elevated and at the top of the range, with forward curves more stable.

SSA issuers are still eyeing the local market, with irregular but sizeable deals, and we discussed some of this in a note on Canadian issuers last week. Unsurprisingly, Alberta Province announced a new 10 year deal in A$ late yesterday and has already garnered close to A$3bn in demand, The larger the size, the bigger the impact will be on term Xccy basis. They will not be the last of the issuers.

Looking at vol, we highlighted the 6m2y/6m10y vol surface last week and suggested it would flatten. It has indeed as long end vols are a little less bid, while top left structures continue to stay elevated. The relative slope at 2bp should eventually invert. We also published a trade idea yesterday which is a 3 month forward 3s/10s conditional bull steepener. This should appeal to liability managers as well as investors given it is a zero premium outlay trade. - MW

Commodities

Crude:

Sticking to the view that $85/85.50 should remain a near term cap and tend to read recent geopolitical developments as likely to cap crude prices though the fact that the war cabinet had voted to “continue operations in Rafah to exert military pressure on Hamas in order to promote the release of our hostages and the other goals of war” and the scenes of tanks rolling through the Rafah crossing certainly adds to the risks of near term confusion. So again, we appear to have moved incrementally towards an agreement though we are clearly not there yet. In addition to the geopolitical situation, the demand story remains a negative in our view - Wood Mackenzie is forecasting the lowest growth for gasoline demand since 2020 which is likely to rise by 340kbpd to stand at 26.5mbpd, down from 700kbpd last year as China nears the point of peak transport fuel demand and the US has surpassed it. OilChem reported that China was issuing a second quota for fuel exports as the nation faces a ballooning surplus amid greater adoption of new energy vehicles. OilChem reported authorities had given permission to export 14mt of diesel gasoline and jet fuel following on from a first batch of 19mt. That compares with 9mt for a second batch last year and 18.99mt for a first batch representing a ytd rise of 18%. And ADNOC also confirmed last week it had ‘officially’ raised its production capacity from 4.65mbpd to 4.85mbpd after laying out a $150bn spending plan in 2022. So, the OPEC meeting on June 1 in Vienna will clearly have its work cut out to maintain current production cuts into H2. Bottom line, we stick to the view that $85/85.50 should remain a near term cap.

Metals:

We also stick to the view that we just cannot get excited by copper above the $9,500/$10,000 region for several reasons. Firstly, our ‘rough’ estimate for combined Chile, Peru and DRC copper production for Jan and Feb combined is up 2.55%yy with Feb being up almost 5%. So, it’s been a good start to the year for raw copper production. Chinese industrial production of refined copper was up +10%yy in March, up 12.4%3myy and up 35% for Q1 versus the average over the last 5yrs. The Yangshan physical premium paid on imported refined copper into China briefly hit zero last week for the first time on daily data back to 2017 pointing to “extremely weak demand for imported cargoes”. Further, Bloomberg reported that China’s copper exports are set to hit the highest in two years as “beleaguered smelters ship out metals to benefit from a powerful rally in global prices”. We get April export data tomorrow. Bottom line, we just cannot get excited by copper in the $9,500/$10,000 region.

Iron ore:

Finally, we stick to the view that iron ore markets should remain capped by $120 though there are few reasons to expect a near term reversal. Iron ore port inventories are at 2yr highs and more than 1std above seasonal average levels. Chinese March steel exports saw a total of 9.88mt dumped offshore, a high back to July 2016 and up 25%yy with exports up 28%yy in the first quarter. The US, Brazil, Chile and Mexico have all announced tariffs and or quotas on Chinese steel putting Chinese dumping of ‘surplus steel’ firmly on the political agenda. China will report April trade data tomorrow. However, the readout from a recent Politburo meeting suggesting that officials will research ways to deal with unsold properties in China has further raised optimism in the construction industry and seen a huge rise in mainland property stocks. Hence the range trade view near term. RR

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