FX

AUD – AUD/USD met resistance around 0.7189 overnight. It seems markets are becoming somewhat de-sensitised to short-term war headlines and clinging to the idea that there will be a resolution eventually. The AU/US 10-year yield spread has come off its recent low (32bp), ticking up slightly following RBA Harper's comments yesterday flagging inflation risks. However, we do flag some near-term risk around further rate compression, which is coming from both sides. Last week’s CPI alongside the prior week’s unemployment rise has added to the possibility of an RBA that has potentially finished its hike cycle, or is at least holding for some time.

Meanwhile on the US front, the drop in oil prices has contained some US rate expectations for now, but Warsh is due to Chair his first FOMC 17 June and given we still haven't returned to unfiltered shipping through the Strait, markets will be watching out for any further hawkish rhetoric (currently 1 hike priced in 2026). Before that, US May payrolls this Friday also opens up some downside if we see this narrative around a stable US labour market confirmed.

Aussie Q1 GDP will be the big event locally today. Partials so far suggest that a large sector of growth was private capex driven by data centre buildouts, meanwhile labour productivity most likely slumped over the quarter and so markets are forecasting a 0.5% print for the quarter. RBA speak is due too; Bullock and Kent (Thur) and Hauser (Fri).

1-2wks: +0.7200 risks build. Reports that a couple vessels were escorted through Hormuz by the US without incident counts for something. 0.7200 should give way if the constructive deal process gives way to a credible outcome. The floor at 0.7100 is now more secure for now. Deal collapse, the less likely outcome, is required to threaten it.

3-12wks: Market patience meets real-economy damage in this window. We pencil in a wide 0.6800-0.7500 AUD range. Worst case scenario: hard Strait impasse and weakening global growth = sub-0.7000, while a credible deal sees AUD ignore soft legacy data and opens the topside. A tangible deal is clearly forming though, so the centre of gravity shifts toward the upper half of our expected range (assuming it lands cleanly and Hormuz reopens on the 30-day timeline).

12wks+: Structural AUD bullishness reasserts, albeit on a longer and less potent timeline. AUD's still high carry, clean fiscal metrics, deep commodity endowments, AI/energy capex credentials leave it well positioned in a resolution scenario. ~AUD100bn super fund hedging should resume, (it's been deferred, not cancelled). The USD impairment narrative is directionally intact, but a relatively hawkish Fed Warsh papers over many structural USD sins near term. 0.75 by 2H26 still the call, confidence interval wider though.- KB/RF

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

NZD/USD last week broke above six-week-old range resistance at 0.5910-30, and is currently consolidating that move. As long as the low 0.59s hold, we’d expect a retest of 0.5995 (late May high). The RBNZ’s more hawkish guidance at the May MPS should continue to support the NZD near term. There’s little local data of note this week, Q1 GDP out on 18 June. RBNZ Chief Economist Conway will speak today on the MPS but it won’t be livestreamed or published.

The US dollar will continue to respond to war developments, as well as this Friday’s payrolls data which could influence the FOMC’s stance.

For the quarter ahead, we retain a neutral bias, pending resolution of the Iran war. An escalation would likely cause a break below 0.5700, towards 0.5500, while a positive resolution would likely ignite a rally towards the 0.6100 area. -IS

Rates

US Rates – While the end of week Payrolls release will be the key data focus, price action so far this week has meandered due to limited new news from the Persian Gulf. Last week’s optimism in global bond markets has slowed, as we expected in Monday’s missive, however we suspect that bullish momentum would continue should an actual deal eventuate. We would expect an initial response of 10bps or more but also caution that any rally beyond that would reflect a “best case” outcome (the Strait opening untolled and uncontrolled, perhaps). We think that is unlikely, and so we would fade any initial bullish impulse. That is because we remain focussed on the inherent medium term risk rewards. Price action will be dominated by the reality of a multi-month timeline before the supply of oil into the global economy returns to “normal” (whatever that looks like) and that will keep inflation fears high

Outright: An agreement would see the tactical 10yr trading range move lower but we expect the lower bound of that range to be around 4.25-4.35%. Bond markets will obviously maintain their high correlation with oil prices and there is little reason to expect the latter to revert to a pre-war level near term. So we would remain strategically short duration and tactically look to sell rallies.

Curve: The recent re-pricing of Fed risks, not surprisingly, saw the UST curve flatten but that has slowed and reversed as some of the markets worst fears have been salved. However, beyond the re-calibration of Fed risks, we remain biased toward a steeper curve. Medium term, the mixture of inflation risks 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 remains around150bps where we suspect it will average in coming weeks. Global investor perceptions of US risks have clearly shifted for the worse. -DM

AU Rates – Last week’s CPI combined with the prior week’s unemployment rise has added some momentum to the evolving narrative of an RBA that has potentially finished its hike cycle, or is at least on hold for some time. As such, there is now only around a 75-80% chance of a further 25bp factored into the forward cash curve. We have been stating that one rate hike factored-in should be the minimum given the over-riding inflation focus within the balance of risks facing the MPB. So, while the market will continue to debate and assess whether those risks are tilting toward a downward growth trajectory, we continue to caution against predicting the end of the hike cycle too early. Of course, whether that caution is seen as prescient this week will depend largely on today’s Q1 GDP outcome. Sentiment suggests that a weaker than expected number will draw far more attention than vice versa.

Outright: Given that we expect domestic policy risks to remain hawkishly-skewed, we remain better sellers into strength. However, that directional bias is held within the context of a broader range trade, rather than a strong bearish trend exerting itself. That is because, even without the assistance of the current “end of cycle” narrative, further policy-related yield rises will be capped. At this stage of the RBA’s tightening cycle, further rate hikes will increasingly slow yield rises across the term structure and will encourage investors to pick up yield when available. As mentioned, we expect that narrative to gain impetus over coming weeks, however we believe it is too early to adopt “end of cycle” duration strategies. So we are tactically neutral at current levels and recommend trading the following ranges with a sell-side bias: YM1 95.40 –95.55; XM1 95.00 – 95.20.

Curve: The curve has been relatively stable, however beyond the near term policy driver, in our view, medium term, curve shape will also be heavily influenced 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: We see EFPs as largely directional at the moment but with more support for bond rally-related widening impulses than the opposite. For now we expect both benchmark EFP spreads to remain within recent ranges.

Semi Spreads: The semi sector will underperform during “risk off” impulses, however we continue to believe that any material spread widening will be capped and any such moves should be viewed as an opportunity. For those looking at “end of cycle” trades, the extra yield and carry characteristics around the 3-5yr maturities will be attractive, adding to support.

10yr Spread to UST: Regular readers would be aware that we have held narrowers since 68bps. The spread is now back at 49bps, so we maintain our position for now, with a target of 30bp before reducing risk. -DM

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

The NZ 2yr swap rate’s uptrend since October has stalled despite last week’s hawkish RBNZ MPS, local rates following the decline in offshore rates as war de-escalation looms. We see the 2yr range for the month ahead at 3.40%-3.70%, with an upward skew given looming OCR hikes.

Market pricing for OCR hikes implies a 90% chance of a hike on 8 July, and slightly more than three hikes in total by year end. Our economists’ forecast is similar, but starting one meeting later, with hikes in September, October and December.

The yield curve’s flattening trend since the peak in late December resumed following the RBNZ MPS, the 2-10yr swap currently at 72bp, down from the cycle high of 120bp in December. We expect further flattening during the year ahead as we enter the RBNZ’s tightening cycle, the 2-10yr swap potentially to 50bp.

NZGB i-spreads have extended the downtrend from record highs in April 2025, last week’s Budget causing a 4bp decline in the 2036 i-spread to 32bp. The Budget surprised by reducing projected issuance in 2028, 2029 and 2030 by $2bn each (markets had expected a $10bn increase overall). We will continue watch for opportunities to buy, and shift our entry to 38bp. Medium term, the rising yield backdrop should see NZGBs outperform swaps. -IS

Funding, basis, and liability management.

The weaker labour market in Australia took the shine off a June rate hike, and that of course has become the consensus view for markets and economists. The CPI last week was benign enough to reduce those odds as well, at least for now. 1bp is now priced for the June meeting, which is fair, as there is always a degree of optionality that needs to be held.

So far this week, MPB member Harper warned of inflation expectations becoming de-anchored, and the FWC gave a higher than expected outcome on wages, though we see no significant risk to inflation from this. Today brings GDP, and it could be a little softer due to public sector activity.

The year ended OIS rate in Australia is 4.58%, and this has continued to pull back sharply from recent highs as the growth outlook splutters along. The fall in house prices for major cities is also a factor.

In term rates, the recent rise has been unwound, and with a structure like 1 year forward 3 year IRS middling around 4.49%, just below the target levels we had already flagged, there is once again value for borrowers considering cover.

Of course, as above, the rate call change is now bringing pricing back and the forward rate sits under the projected cash rate. Borrowers may become more reticent to hedge, now the steam has come out of the rate hike story.

In Xccy basis, the market has seen a swathe of deals come to market as the underlying A$ debt demand continues, precipitating a shift lower on the curve. The potential for hyperscalers to come to the market was a question we were asked about in our recent Europe trip, and the impact this would have on Xccy, tenor basis and EFPs. We looked at the Xccy basis curve in a Wrap early last week, and in deals saw QTC go to the CHF market for CHF165m (A$300m) of 15 year issuance, while CBA backed up this week with 10 and 15 year tenors also in CHF. KfW issued in A$ yesterday, though a short tenor and there are still a few other Kangaroo deals being priced. All up, Xccy basis is fairly static for the moment and driven by short term deal flows. -MW

Commodities

Crude:

Iranian semi-official news agencies are indicating that messages from Iran on a possible deal “had stopped a few days ago,” with the last message being that Iran was seeking a complete halt to Israel’s incursion into Lebanon. While Israeli moves towards Beirut appear to have halted, Reuters reported that strikes on Southern Lebanon continued on Tuesday. Meanwhile, Centcom confirmed it had fired a Hellfire missile into the engine room of an unladen tanker heading towards Kharg Island, making it the sixth such attack.

With Brent and WTI having hit five-week lows in the $90s last week, and US average gasoline prices dropping noticeably over the last week or so, the US administration appears to feel little pressure to force talks out of this impasse. Yet the Strait remains closed, the global economy has lost more than 1bn barrels of crude and product output, inventories are plunging, and the only thing keeping the system away from operational floors is SPR releases.

We get weekly data on the US SPR release. Of the 79.7mb publicly awarded, 50mb has been released so far. Based on known data and reasonable estimates, the pace of weekly releases is set to drop sharply through June. Having hit an all-time record of 9.9mb in the week ended May 15, we estimate weekly releases will fall back below 5mb by the end of this month. Average US crude draws over the last five weeks have been close to 5mb per week, while the average SPR release has been 8mb, for a total draw of 13mb. As the pace of SPR releases slows through June, more of that draw will have to come from commercial reserves.

Now the US DOE still has capacity for a further 90mb of RFP before reaching the 172mb commitment. However, without another RFP round, and assuming the current draw rate, US commercial crude inventory will likely be at the lowest level in a decade within six weeks.

Product draws look even more dramatic. As of the previous week, US distillate stocks were already at the lowest absolute level in 23 years, while gasoline stocks were at the lowest seasonal level since 2014. With distillate exports having hit all-time record levels, crude exports having recently hit all-time records, and refinery utilisation rates at the highest seasonal level in almost a decade, the current situation is unsustainable for more than a few weeks without the DOE offering to lend more barrels to the market.

That leaves us with the key point: the market is asleep at the wheel, even as we drive rapidly towards aggressive tightening in crude and product markets. Another round of US RFPs and a possible IEA SPR release can delay the inevitable. But without that, the fundamentals are clearly in place for another sharp rise in crude and product prices as we move through the end of June into July. As long as the Strait remains technically closed, we stick with the view that Brent spikes in late Q3/early Q4 in the $120/130 region.

Metals:

Copper has blasted above $14,000, with weak production, concerns about sulphur shortages, the potential for refined copper tariffs in the US and the massive AI buildout providing strong support. Cancelled warrants in LME warehouses are at the highest level seen since 2021, while on warrant stock has dropped to 3-month lows suggesting the next wave of the ‘great copper migration’ story into the US is about to commence, which opens up further upside for copper as traders scramble to find physical tons to deliver into the US.

Meanwhile, aluminium remains well supported by clear evidence of the hit to global production. If we seasonally adjust global aluminium production for April, it dropped to the lowest level in 18 months. In other words, we are beginning to reverse the surge in global production seen in 2025 as energy prices eased, the hydro deficit in the Yunnan province ended and Chinese capacity exploded ahead of the cap in production kicking in. Now, Guinea is reported to be finalising plans to limit exports of bauxite from June. Around 75% of the bauxite that China imports come from Guinea. All this should maintain the push above $3,700 towards record highs. -RR

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