Forex Flash: GBP/AUD now related to 2-year swaps – Westpac

The relationship between the GBP/AUD and 2 year swap spreads has been fairly useful historically, though it started to break down in mid-2011 as markets began to price in RBA easing but AUD suffered little sustained damage, especially as the Bank of England felt compelled to ramp up QE again in response to domestic weakness in 2011. The latest sell-off in GBP/AUD has not been backed by moves in the two-year spread. The minutes from the February RBA meeting reinforced its message that muted inflation means it has “scope” to cut rates again if demand falls short of expectations.

“The key to Westpac’s base case of a March rate cut is the capex survey on 28 February, especially the investment intentions for 2013/14. Markets are currently pricing only 25% chance of a March cut but have -37bp priced in total.” Predicts the Westpac Analyst Team.