The divergence between cable and the 2yr......>

FOREX: The divergence between cable and the 2yr swap spread has started to

narrow. The divergence has previously been driven by rising US rates, with DXY

trading at a discount to trade-weighted swap spreads.

- We highlighted the cable-swap spread back in June and suggested that the

divergence would correct as a result of sterling taking another leg lower, a

broad dollar rally, higher UK rates or lower US rates.

- So far the driving force has been a sharp drop in US rates as monetary policy

expectations have been revised. Moreover, we have noted recently the striking

divergence in US and UK implied rate probabilities. With the OIS market starting

to price in the possibility of a 2019 Fed cut, while the GBP OIS pricing is

still on the side of a hike (although the probability has been scaled back).