Positive weekend developments with US and Iran military action paused. NZD recovers some lost ground and is modestly higher on the key crosses. Higher Australian rates drive up NZ rates, with 2-year swap closing at a fresh cycle high

On Friday, President Trump announced a fresh round of tariffs, with the expiring 10% country-specific tariff rates replaced by 10% or 12.5% rates under a different act, as he tiptoes around various laws. NZ’s tariff rate rises to 12.5% and will continue to exclude beef and kiwifruit. Cue another round of legal challenges, but for now all and sundry will have to swallow the new tariffs. Late in NY trading, Trump threatened to hit the EU with more tariffs following the “robbing” of American tech companies after the EU imposed fines for breaching the bloc’s digital rules.

While the US and Iran continued to exchange missile fire in the Middle East while markets were open, oil prices eased after the NZ close on Friday. Following their recent strong run, which took Brent crude back above USD100, prices closed around USD97, down 4% on the day. Headlines through the session were mixed.

Reuters reported that Pakistan is exploring a path towards resuming stalled US-Iran talks aimed at ending the war, following a push initiated by China. Exploratory discussions reportedly took place with Iran’s interior minister during his recent visit to Islamabad.

The NY Times reported that Iran’s new supreme leader is far more interested than his father and predecessor in pursuing a nuclear weapon, according to US intelligence that predated the war. Bahrain, Kuwait and Saudi Arabia have all been involved in military action in some way, with the WSJ reporting that the first two countries launched secret aerial attacks inside Iran earlier this month. Saudi Arabia struck a port in Yemen in retaliation for earlier Houthi attacks on two Saudi oil tankers in the Red Sea. President Trump said the US is “locked and loaded” for major new strikes on Iran but has not yet made a decision.

In an update over the weekend, the NY Times reported a reason Trump has decided to hold off plans to escalate military action for now is in part due to concerns that the war could drain the already-diminished stores of Patriot anti-missile interceptors and other air defence weapons in the region. After striking Iran for 13 days, the US paused strikes against Iran for the past two nights and Iran signaled it was refraining from retaliatory attacks and holding talks with Oman over the Strait of Hormuz. This sets the scene for increased risk sentiment and perhaps lower oil prices when Asian markets open today.

Lower oil prices helped relieve some upward pressure on global rates during Friday night’s trading session. US 2- and 10-year rates fell a couple of basis points on the day, with the 10-year rate closing at 4.68%.

Economic data didn’t move the needle. Services PMI data for July were stronger than expected across the UK, Europe and the US, while manufacturing PMIs also beat consensus everywhere except the US. The reports noted some positive impact from the FIFA World Cup, which supported hospitality companies, while the US July 4th 250-year celebrations were also noted. Good weather in the UK was another factor and likely helped drive stronger June retail sales data. Market reaction was muted, to the extent that last week’s ramp-up in Middle East tensions warranted caution about extrapolating growth trends.

Japan’s CPI inflation data showed headline and core rates of 1.6–1.7% y/y in June, with the low figures continuing to be dragged down by government subsidies that have relieved inflation pressure. The market took little comfort from the figures, with JGB yields higher across the curve and larger rises at the long end.

US equities closed flat on the S&P500 index, with only the IT sector dragging the index lower while the other ten sectors posted gains. That sectoral dispersion was reflected in the tech-heavy Nasdaq index falling 0.6%. The Euro Stoxx 600 index closed up 0.8%.

Currency markets showed only modest moves on Friday. In the overnight session, the NZD recovered some of the previous day’s loss, ending the week near 0.5790 after taking another peek just above 0.58. NZD crosses were modestly higher, with NZD/AUD recovering to 0.8290 as the AUD closed around 0.6980.

That wrapped up a week in which the USD was broadly stronger, supported by a safe-haven bid as the Middle East conflict escalated. CFTC data showed the aggregate dollar long position reached a fresh high of USD43b, the largest in nearly 11 years. Of note, the data showed a notable closing of some short NZD positions, which shouldn’t surprise those watching the market, given the NZD’s outperformance through July.

In the domestic trading session, NZ rates posted strong gains across the curve. Blame the Aussies, with Australian rates showing a similar move over the relevant period. NZ’s 2-year swap rate closed up 11bps to 3.81%, a fresh high for the cycle. The 5-year rate rose 11bps to 4.15% and the 10-year rate rose 9bps to 4.50%, although neither breached their March highs. NZGBs showed similar moves, with short-end rates up 11bps, the 10-year rate up 8bps to 4.79%, and ultra-long rates up 6bps.

On the economic calendar, it is a light start to the week, with Germany’s IFO survey and US durable goods orders. The rest of the week is busy, with central bank meetings from the Fed, BoE and BoJ. Top-tier economic releases include GDP data for the euro area and US, and CPI data for Australia and the euro area. For NZ, ANZ’s business and consumer confidence surveys are released.

Jason Wong is the senior currency Strategist at BNZ Markets.