FX

AUD – At a crucial juncture here, just ahead if 0.6500 and with Q1 CPI due today. The next several days price action will clarify whether last week's breakdown was a bona fide range reset lower or a false break. We remain skeptical AUD prospects, with the core foundations for US resiliency still in place, i.e. easy fiscal policy/Bidenomics. A 5%-handle on the US10yr is not a big call from here, with Fed pricing having little in the way of a concession for even more hawkish tail-risks, while the term premium remains a good 40bp shy of its 2023 peaks when 5% last traded. We suspect sustained trade above 0.6550 will prove very hard yards.

USD – Should remain well supported. After struggling to post further gains, a turn in data (soft flash Apr PMIs) has opened the potential of further consolidation into this week’s US 1Q GDP and spending/PCE releases. Fed speakers are now in blackout ahead of next week’s FOMC and so earnings, as well as data, will be of increasing interest. The 1Q GDP and PCE are expected to reflect data showing the strong US economy and reinstate the focus on policy divergence driving recent USD outperformance. The 105.50-75 area should provide support for DXY rebounds to retest 106.50 within potential moves towards the 107.75 area, though moves may well become less dynamic.

EUR – EUR consolidated from the near test of 1.0600 gained momentum from unexpectedly firm regional flash PMIs and yet further less dovish rhetoric from the ECB. Nevertheless, the core view of easing commencing in June remains solid and so the divergence policy stances with US should lead to further bouts of EUR underperformance. EUR/USD rebounds have managed to breach 1.0700 but are still likely to struggle (resistance zone between 1.0745-75). A solid US 1Q GDP outcome and firm PCE data would underscore the divergence of activity, despite the Flash PMIs, and push EUR back through the 1.06’s to test support into 1.05 to 1.0450 area.

JPY – As USD/JPY edges towards 155.00 intervention risks remain whilst US 1Q GDP and PCE data will jostle with Friday’s BoJ policy announcement as interim drivers of USD/JPY. Limited scope for tweaks to BoJ economic and projections may dampen their guidance, despite threats of FX action which garnered more weight from G7’s united commitment to contain FX moves. However, any intervention action will likely be directed towards avoiding acceleration of the current uptrend or should JPY weakness become more apparent against other Asian currencies and FX majors. Nevertheless, strong US strong growth, diverging yield spreads and extended US policy patience still suggest more upside in USD/JPY. A breach of 155.00 area will turn market focus towards the 1990’s highs around 160.00.

GBP – After sliding to test 1.2300, GBP/USD has squeezed sharply towards interim retracement resistance in the 1.2450-1.2500 area due to a markedly more hawkish speech than anticipated from BoE’s Chief Economist Huw Pill. This highlighted that the split MPC remains unlikely to alter their current policy stance in May and appears reluctant to ease ahead of 2H’24. UK Flash PMIs also posted a marked lift in activity which underscores the recovery from the late 2023 recession and adds to the mix of concerns within the MPC ahead of their 9th May meeting. GBP’s current rebounds are likely to be capped by UK’s political uncertainty is likely to become more of a market issue ahead of local and Mayoral elections in England and Wales. A retest of the 1.22-1.23 area remains likely as political uncertainty and UK’s fiscal deficit, that was highlighted this week, weigh on GBP.

CNH – The PBOC's reference has been set above 7.10 for 6 consecutive days and USD/CNY continues to push hard up against the +2% band top. With local rates out to 2yrs more than 300bp below US rates, substantial onshore USD demand leaves USD/China risks slanted decisively to the topside. Better domestic activity trends will do little to turn CNY with yield support so lacking. The US Nov election adds more upside risks for USD/China, re Trump's tariff & China decoupling plans. USD/CNH a buy into the 7.2360 region if seen. – RF & TR

NZD - NZD/USD has risen due to the USD falling in response to weaker US PMI data. A sustained rise above 0.5940 would add weight to the possibility of an emerging bullish trend, and would likely be driven by US factors rather than NZ ones (there’s no major NZ data out this week).

Looking much further ahead, if our economists’ forecasts for the Fed and RBNZ (easing to start in June 2024 and February 2025, respectively) prove correct, NZD/USD could rebound towards 0.6400 by year end. Alternatively, if the Fed were to defer its easing cycle, the NZD recovery would be smaller.

We remain short AUD/NZD from 1.0945 (entered 4 April), but given event risk from AU CPI data today, we have shifted our stop-loss level to 1.0945. - IS

Rates

US Rates – Geopolitical tensions continue to be wound back as a central market focus, with a broad “risk on” thematic being supported by the data overnight. The evolving question now is what “higher for longer” on policy means for yields across the term structure. There are now less than 2 rate cuts factored-in for 2024, with December dialled down to below 40bps. That has lifted the 10yr note’s tactical yield trading range and while there has been a pause in the recent bearish impulse, 4.75% is a likely next target and a return to last October’s highs around 5% appearing to increasingly considered. The recent surge in bearish sentiment and momentum is challenging the tactical dip-buying approach to bonds which has been supported by the view that investors will continue to seek yield as we transition to an easing cycle. However the good demand for the 2yr note auction was a positive sign that the broad yield enhancement thematic remains in place. We will get further insights into that thesis as this week’s auctions continue. For now, we remain neutral on outright yields at current levels and expect the 2-10yr bond curve to further disinvert over time. - DM

AU Rates – RBA pricing has been pared in line with the US re-pricing. There is now only around an 80% chance of a 25bp cut factored-in for 2024. That is clearly out of line with Westpac’s current forecast of two cuts this year, beginning in September but it does reflect the general global consensus that the RBA is unlikely to cut before the Fed. While Westpac’s Chief Economist Luci Ellis has written about how that could play out, the market is clearly showing an unwillingness to consider that possibility, although an improved quarterly CPI outcome today could change that perception. From a risk reward perspective there is likely to be something in the data for everyone, however we expect a slightly more bullish reposne to a weak number than a bearish response to stronger data – although the details will be important. For now, while the CPI will provide some idiosyncratic domestic price action, directional impetus will largely be led by US outcomes. Medium term, AU outperformance during US-led sell-offs should continue to see the 10yr AU-US bond spread make incremental gains. While the current spread of around -30bp will surely be a deterrent to global investor flows, we would still fade any widening impulses. - DM

NZ Rates - NZ swap rates are consolidating near multi-month highs, having responded to the mostly solid economic data in the US, hawkish comments from Fed officials, and NZ non-tradables CPI which was stronger than the market or RBNZ expected. The 2yr swap at 5.10% is up 50bp this year, with any further gains likely to be capped by 5.25%. Today’s AU CPI will be influential, while the NZ data calendar will be low key until the Q1 labour data on 1 May.

Market pricing of OCR cuts has been significantly pared over the past few weeks, with the first cut now priced for October (at a 60% chance). Our economists continue to forecast no cut until Feb 2025, noting core inflation remains sticky.

NZDM yesterday announced the final syndication in FY23/24 will be a tap of the 2028 in June. The weekly NZGB tender will be held today, given Thursday is a holiday (ANZAC Day). - IS

Funding, basis and liability management

A$ funding markets look towards Q1 CPI data today, which will be watched closely as It feeds into the RBA’s updated May outlook and decision-making. Westpac economists estimates CPI to rise by 0.8%q/q and 3.5%y/y, with the trimmed mean up 0.8%q/q and 3.8%y/y. 0.8%q/q is also the market consensus, and we see risks to the upside, given a global trend in stickier inflation data.

Spot BOB spreads have moved wider post a normalisation following moves lower given the fixed rate full allotment repo discussion as discussed in previous SVOAPs. We see concern over geopolitical tensions in play, with markets also looking towards the upcoming June TFF maturity, where funding had been more volatile leading up to the prior maturity. Our view is that FX-OIS and BOB spreads will largely remain more muted over the longer term despite spikes in the shorter term.

Outright yields moved slightly higher over a quiet session and the 3 year swap remains slightly above 4%, a level that we had flagged to have a gravitational pull. Markets will focus strongly on today’s CPI figure, and while the general consensus does reflect that the RBA is unlikely to cut before the Fed, a weaker CPI print could price more easing into the front end. Markets have largely adjusted to a “higher for longer” scenario in-line with US pricing, there currently remains a 70% of a rate cut factored in before November. With the improved labour market outcome last week, CPI today should provide more clarity on whether Australia faces a decision to cut before the Fed.

Impacting the A$ funding market this week, the Apr-24 target bond matured over the weekend and pays back into the market. This has seen 1m FX-OIS hold in at tighter levels. On the XCCY front, there were a few SSAs in the market yesterday with the Province of Québec pricing a $1.35bn A$ Benchmark 10-year Kangaroo bond which has seen XCCY in this tenor and the EFP box grind tighter. - UC

Commodities

Crude:

Crude markets continue trading as if the very clear signs of restraint between Iran and Israel, despite the first ever direct strikes rather than via proxies, mean thankfully that there is little chance that this will develop into full-scale conflict. And with clear signs of a deterioration in supply/ demand balance, given the surge in crude inventory in the US, which hit the highest level since June last year, plus ongoing evidence of weak product demand with apparent US diesel demand falling to its lowest seasonal level since 1999 on a 4-week average basis, and diesel contracts in the US, Europe and Asia flipping into contango, little wonder that the $90/95 level is proving such an important cap for Brent. The flipside of course is that the US last week allowed a Treasury Department license permitting oil and gas production in Venezuela to expire without renewal and the Ukraine/ Israel funding bill that passed the House on Saturday included sanctions on Iranian oil. The bill includes measures to broaden the scope of sanctions on Iran’s exports of crude to include foreign ports, vessels and refineries that knowingly engage in trade – and these have worked very well in stemming the flow of Russian crude to India and China. So those factors should limit the downside. Thus, we stick to the view that it’s hard to see a major push above the $90-$95 region without a further spiral in geopolitical risks, but prices should remain well supported on dips towards $85.

Metals:

We remain wary of copper above $9,500 and aluminium above $2,500 for a number of reasons. Last week China released industrial production data for March including refined copper production which was up 10%yy, up 12.4%3myy and up 35% for Q1 versus the average over the last 5yrs! We also got data for Chinese refined aluminium production in March. That was up 6.86%yy and 5.86%3myy while being up 14% for Q1 versus the average of the last 5yrs. Remembering that China represents more than 44% of global refined copper production and more than 50% of primary aluminium production, that’s a very different story from what the market is telling itself, that we are seeing warning signs of refined metal shortages in the months and years ahead. Chinese copper inventories are at the highest level in 4yrs and continue rising. And while Chinese aluminium inventory levels are low by historical standards, they continue rising well after the ‘normal’ peak seen in March.

So why are metals up as much? We would put a lot of weight on recent sanction changes on Russian metals as a key driver for the recent gains. Under Executive Order 14068 in the US, “the importation and entry into the United States … of aluminium, copper, and nickel of Russian Federation origin is prohibited” noting that this determination excludes aluminium, copper, and nickel … that was produced prior to April 13, 2024”. The LME also introduced rule changes such that Russian warrants are divided into two types. “Type 1 Russian warrants” cover warrants in existence as at the end of 12th April 2024. Type 1 warrants “can be re-warranted at the same warehouse and the underlying metal can be moved between warehouses subject to conditions”. “Type 2 Russian warrants” cover warrants issued on or after 13 April 2024. UK Members and UK Clients “will not be able to cancel or withdraw the metal underlying Type 2 Russian Warrants for their own account (or request or order the cancellation or withdrawal of) Russian Warrants in order to take physical delivery of the metal for their own account or change the location of the metal to which the warrant related. UK Members could cancel or withdraw the metal underlying Type 2 Russian Warrants for the account of a non-UK Client”.

Now according to Bloomberg, “Glencore and Trafigura’s sanctions games are draining the LME” of aluminium. By withdrawing Type 1 warrants then re-registering the metal under a type 2 warrant, the metal can only be traded by non-UK persons, increasing the period of time it will sit there generating “rent sharing”. However, the LME clarified those rule changes overnight noting that “no warehouses shall agree any Post-Sale Economic Incentive Arrangement [if] the terms of effect of which is to prevent a later metal owner from withdrawing from the warehouse the underlying metal”. Not surprisingly we saw copper down 1%, nickel down 3.26% and aluminium down 3.5%. Tin also plunged 7.4% to be down 11% so far this week. Bottom line we just don’t see the prompt demand supply imbalance required to push copper sharply higher at the moment, and once the current volatility subsides, we expect to see prices settle back towards March levels.

Iron ore:
Last week we also got Chinese steel production and steel exports for March. Production came in pretty much in line with our expectations at 88mt while March steel exports came in at 9.88mt. Now that’s the highest level for Chinese steel exports since July 2016. Exports have been an important ‘release valve’ for China’s overproduction of steel, and last week we had data confirming that we are approaching the record highs seen in 2015. However, US President Biden last week called on the USTR to triple the tariff on Chinese steel from 7.5% to 25% that was levied on top of Trump’s steel tariffs. And USTR Katherine Tai was highly critical of China’s “nonmarket practices” which are threatening the steel and aluminium sectors in the US in a Bloomberg interview late last week. Over the weekend Chile slapped anti-dumping tariffs on Chinese steel products with a 33.5% import tax on steel balls and 24.9% on steel bars. Brazil followed Chile announcing quotas and tariffs for steel imports. Quotas will be set on products whose imports increase by 30% this year when compared to the average between 2020 and 2022 with a tariff set at 25%. Latin America imported 10mt of Chinese steel last year, up 44%yy according to data from the Latina American Steel Association. The rising global backlash to Chinese dumping of excess steel should help to cap iron ore in the ‘mid teens’ in our view. - RR

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Central bankers are unlikely to reverse the recent re-pricing and bearish impulse. - A$ & NZ$ Rates Strategy

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