Trade idea: Short GBPAUD for 3.75% reward - ~1.9126 -> ~1.8410
Interest rate spreads between UK and AU are likely close to peak - with UK likely to cut (or expected to cut) rates sooner than AU - due to weakening consumer confidence/current rates being at a higher point at point of writing, alongside GDP slowdown.
Assuming UK 10Y rates drop by 0.5% (50bps) or AU 10Y increases by 0.5% - former has a higher probability than the later, then suggested downside for GBPAUD is ~4%.
Why AU interest rates will likely hold longer than UK
AUs current interest rates are 4.35% vs UK at 5.25%.
AUs inflation (sept) is 5.4% vs UK core inflation (oct) is 5.7%
AU Annual GDP growth rate (Y/Y): 2.1% (latest: June) vs UK Annual GDP growth rate at 0.6% (latest: Sept)
Catalyst
1. GB03MY and GB06MY are 5.326 and 5.353 respectively - higher than current rates of 5.25% - suggesting rate hikes expectations are present - which could disappoint - catalyst for downside.
2. GDP slowdown in UK materializes faster than AU due to tighter monetary policy.
*Note that if UK were to continue increasing rates - due to reacceleration of inflation - GDP slowdown is likely to be exacerbated - increasing downward pressures on GB10Y.
Interest rate spreads between UK and AU are likely close to peak - with UK likely to cut (or expected to cut) rates sooner than AU - due to weakening consumer confidence/current rates being at a higher point at point of writing, alongside GDP slowdown.
Assuming UK 10Y rates drop by 0.5% (50bps) or AU 10Y increases by 0.5% - former has a higher probability than the later, then suggested downside for GBPAUD is ~4%.
Why AU interest rates will likely hold longer than UK
AUs current interest rates are 4.35% vs UK at 5.25%.
AUs inflation (sept) is 5.4% vs UK core inflation (oct) is 5.7%
AU Annual GDP growth rate (Y/Y): 2.1% (latest: June) vs UK Annual GDP growth rate at 0.6% (latest: Sept)
Catalyst
1. GB03MY and GB06MY are 5.326 and 5.353 respectively - higher than current rates of 5.25% - suggesting rate hikes expectations are present - which could disappoint - catalyst for downside.
2. GDP slowdown in UK materializes faster than AU due to tighter monetary policy.
*Note that if UK were to continue increasing rates - due to reacceleration of inflation - GDP slowdown is likely to be exacerbated - increasing downward pressures on GB10Y.
Commento:
Pair moving as anticipated due to softer uk inflation - given that UK interest rates are significantly higher than core inflation - rate cuts are likely sooner than what market expects.