Oil prices fall despite ongoing tensions between the US and Iran. An escalation over the weekend could further threaten the ceasefire. Currency and rates markets little were changed. NZD/USD remains near multi-month lows

Risk-sensitive assets came under pressure in Asia on Friday, with AI-linked regional equity indices lower and the Kospi suffering sharp losses, triggering a circuit breaker for the second time last week. US indices finished broadly flat, although tech stocks remained under pressure as chipmakers weakened. In a sign of rotation beneath the surface, the equal-weighted S&P 500 closed near a record high. Lower oil prices also helped sentiment. US Treasuries were little changed, while the US dollar recovered from an earlier decline.

Brent crude fell below US$72 per barrel, even as President Trump accused Iran of violating the ceasefire by targeting cargo ships in the Strait of Hormuz. Trump said four attack drones were launched at ships in the strait, one of which hit a cargo vessel, while the others were downed. Ship transits have nevertheless continued to rise. Oman has told European officials there will be no return to the pre-war status quo, with transit fees potentially introduced for navigation or de-pollution services.

The US struck Iranian missile and drone storage sites and coastal radar installations, describing the action as a “powerful response” to Iran’s attack on a commercial ship in the Strait of Hormuz. Iran later said it had targeted US bases in Kuwait and Bahrain. The developments, which occurred after the weekly market close, risk undermining the fragile ceasefire between the two countries.

Minneapolis Fed President Neel Kashkari, a voting member of the FOMC this year, said signs of broader inflation pressures led him to pencil in one rate hike in the latest projections, reversing his previous forecast for one cut in 2026. Kashkari said the concern was not just the Middle East, but broader inflation pressures. While not in a rush to hike, he wants to see how the data evolve and expects policy to remain steady in 2027.

Treasuries held recent gains as oil prices extended their slide toward pre-war levels and markets priced less Fed tightening in coming months. The 10-year Treasury yield ended last week at 4.37%, its lowest level in six weeks. Markets have also pared ECB hike expectations as lower oil prices reduced the risk of persistent inflation, with close to one 25bp hike priced by December. The 10-year bund yield was steady at 2.85%.

Currency markets were subdued, with only small net moves in G10 currencies relative to the local close. An initial dip in the US dollar reversed, while the yen remained near its weakest level since 1986, keeping speculation over intervention by Japanese authorities alive. The NZD has been confined to a narrow range in recent sessions and is consolidating near 0.5850, its lowest level since November last year. CFTC data, covering the period to last Tuesday, showed the aggregate US dollar long position rose by another $5b to $34b, matching the peak reached in January last year.

Tokyo CPI, considered a leading indicator of nationwide price trends, increased in June, keeping the Bank of Japan on track to raise rates further. The core measure, which excludes both fresh food and energy and is closely watched by the BOJ as a gauge of underlying inflation, rose 1.9% y/y, while headline CPI increased 1.7%. Markets are pricing close to one additional 25bp hike by year-end. The yen showed little reaction to the data.

It was a quiet end to the week for NZ fixed income in the local session on Friday. Swaps were 1bp higher across the curve. 2-and 10-year rates closed at 3.32% and 4.02% respectively. The bond curve had a 2bp parallel shift higher with the 10-year benchmark ending at 4.36%.

The only domestic data of note is May monthly filled jobs. Eurozone economic confidence data are due later this evening but should have limited market impact. The ECB Forum on Central Banking opens in Sintra, Portugal, with introductory remarks from ECB President Christine Lagarde.

Stuart Ritson is the senior Interest Rates Strategist at BNZ Markets.