• Market wobbles. Fears of a re-escalation in Iran dampened sentiment overnight. President Trump extended the ceasefire this morning.
• FX moves. USD firmer due to higher oil & strong US retail sales. NZD holds up because of NZ CPI. AUD lost some ground. More bursts of vol. expected.
Global Trends
A few more Middle East related gyrations across markets overnight. Risk sentiment was on the backfoot for most of the trading session on fears there might be a re-escalation of the conflict given the ceasefire deadline was approaching, US Vice President Vance’s trip to Pakistan had been put on hold, and Iranian officials stressed their country would not accept negotiations under the shadow of threats. US and European stocks slipped back (S&P500 -0.6%), oil edged up, and so did bond yields and the USD.
However, earlier this morning, US President Trump walked things back from the brink once again by announcing that in a response to a request from Pakistan mediators to “hold off attacks” the ceasefire would be extended until Iran submits a new proposal “and discussions are concluded, one way or the other”. US equity futures have rebounded (S&P500 futures +0.4%), although across other assets classes there has been a limited reaction. Brent crude oil is hovering near US$99/brl, and in FX the USD has held onto gains stemming from the geopolitical developments and strong US retail sales figures (+1.7% in March). EUR has dipped towards ~US$1.1740, USD/JPY has nudged up to ~159.40, GBP is just above ~$1.35, and while the NZD held its ground after yesterday’s stronger than expected NZ CPI inflation data (now ~$0.59) the AUD has drifted a bit lower over the past 24hrs (now ~$0.7154).
As discussed over the past few weeks, the situation in the Middle East is fluid, and given the parties involved more brinksmanship and bursts of market volatility should be anticipated for a while yet. Indeed, as our market based TACO Index shows (i.e. Trump Always Chickens Out) the perceived pressure on President Trump to reach a durable resolution doesn’t look to be as high as it was when the initial ceasefire was announced because of the strong rebound in US equities, pull-back in oil prices from their peak, and decline in bond yields. Beyond the conflict we remain of the view that the effect on supply-chains and global energy might take months/quarters to clear up, not days/weeks, even on the assumption more ‘normal’ operations via the Strait of Hormuz (eventually) resume. The events look set to cast a long shadow over the world economy with global growth weaker and inflation higher than forecast at the turn of the year. The latest global business PMIs (released Thursday), as well as CPI inflation figures for March from the UK (today 4pm) and Japan (released Friday) might give a snapshot of the macro impacts. In our opinion, the uneasy economic backdrop, combined with the higher level of oil prices (because of the US’ move to becoming a ‘net energy exporter’) could generate more near-term support for the USD.
Trans-Tasman Zone
Renewed wobbles in risk markets, coupled with the increase in oil prices and better than expected US retail sales figures supported the USD over the past 24hrs (see above). This has seen the AUD drift a little lower. That said, at ~$0.7154 the AUD is still near the top of its cyclical range. It has been a similar story on some of the major AUD cross-rates with the AUD treading water against EUR (now ~0.6092) and JPY (now ~114, a region last traded in late-1990), and losing ground versus GBP (now ~0.5298), CNH (now ~4.8840), and NZD (now ~1.2141).
NZD held up against the USD (now ~0.5892) due to higher than anticipated NZ CPI. NZ headline inflation held steady at ~3.1%pa in Q1, above consensus and the RBNZ’s forecasts. Notably, the March quarter figures only partially captured Middle East impacts, with those forces set to push NZ inflation higher in Q2. Given the signals from pricing intentions in business surveys and other possible second round effects we think the risk of inflation becoming embedded across the NZ economy is increasing. This in turn points to the RBNZ needing to shift interest rate settings out of ‘accommodative’ territory and back towards ‘neutral’ later this year. A move as soon as the 27 May meeting can’t be ruled out. Markets are fully discounting a RBNZ rate rise by the July meeting, with ~115bps of hikes factored in by Q1 2027. We believe that an RBNZ rate hiking cycle, and assumption energy flows via the Strait of Hormuz eventually begin to normalise, could be tailwinds for the beaten down NZD. Particularly as NZD/USD is tracking ~2-3 cents below our model estimates, and AUD/NZD ‘fair value’ is estimated to be closer to ~1.18.
For the AUD, global forces, especially events in the Middle East, and swings in risk sentiment will remain in the driver’s seat. As discussed, the effects on the global economy, particularly on activity across Asia, are still in their infancy. In our judgement, based on how much more RBA tightening is already baked into the Australian interest rates curve (another ~51bps of hikes are priced in by year-end), the global growth headwinds, and with negative domestic consequences of higher mortgage rates and fuel costs in the pipeline, the AUD could struggle to add to recent gains. Especially as a lot of ‘good news’ already looks factored in given the AUD is tracking ~1.5-2.0% above our ‘fair value’ estimates and positioning (as measured by CFTC futures) is ‘net long’.
