ExchangeRates.org.uk – Currency analysts at Lloyds (LON:) Bank highlight a divergence between (Cable) and gilt-UST yield spreads, with GBP pricing in a gloomier UK economic outlook despite resilient gilt yields.While historically Cable has been closely linked to 5-year bond yield spreads, this relationship has weakened in November.
Instead, FX markets seem more influenced by UK fiscal sustainability risks, amplified by an expansionary budget.
The UK economic outlook, potentially worsened by employer NICs increases, is being reflected more strongly in FX movements than bond yields.
Analysts suggest this disconnect might resolve if labour market data starts reflecting business concerns.
Key Quotes
“Two-thirds of the variation in Cable has been associated with variation in the 5yr bond yield spread between gilts and US Treasuries.”
“During November there has been a decoupling… spot GBP has weakened versus USD, despite 5yr gilt yields remaining high versus USTs.”
“The FX rate doesn’t look quite so far off base if 1y1y forward OIS swaps in GBP and USD are used as the expected rate differential proxy instead.”
“Some of the bond yield spread looks to be a reflection of UK fiscal sustainability risk, following the surprisingly expansionary Budget.”
“The risk that the UK economic outlook has deteriorated relative to the US recently has shown up more in FX than yield spreads.”
“One way that anomaly could correct is if the recent gloomier rhetoric from businesses on the consequences of NICs rises starts to show up in labour market data.”
This content was originally published on ExchangeRates.org.uk
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