Catalonia’s independence vote drags the euro

October 2, 2017 09:37 AM

The Euro came under pressure early Monday, falling more than 0.4% against the USD after preliminary results from the weekend’s Catalonia referendum showed that 90% of Catalans are in favor of independence.

There’s a high chance that Spain may be headed towards a new crisis, especially if Catalonia’s President, Carles Puigdemont, declares independence as he has promised to do in the next 48 hours. This will lead to more violence and probably an intervention from EU leaders, who will come under pressure to take action.

Traders should be monitoring spreads between Spanish and German bond yields in the next couple of days. If spreads widen significantly, investors will become seriously worried about the outcome of the referendum vote, leading to a further selloff in the Euro, but this is not evident yet.

Catalan’s referendum is not the only reason for the fall in the euro/U.S. dollar (EUR/USD) currency pair. In fact, the dollar is rising across the board, as the U.S. Treasury’s yield curve shifted upwards. Given that there wasn’t any new fundamental information released over the weekend, reports that former Federal Reserve Governor Kevin Warsh had met with President Trump and Treasury Secretary Steven Mnuchin, for a possible nomination to chair the Fed, is the only explanation for the shift in the yield curve. We do not yet know how Warsh would lead the Fed in the Trump Era, but given the reaction seen in bond markets, investors see him as a more hawkish candidate than Federal Reserve Chair Janet L. Yellen

Speculation around the Fed Chair appointment will keep fixed-income traders busy in the days to come, and currency traders will benefit from the moves in yields. However, this speculation should end, when the President announces the name of his nominee in two to three weeks.

The European economic calendar is relatively light this week. Traders will be focusing on PMI data from the UK, the jobs reports from the U.S. and Canada, and the Reserve Bank of Australia interest rate decision. The U.S. NFP is likely to deviate hugely from this year’s average. Economists are currently anticipating a figure less than 100K. However, I do not think this will have a negative impact on the dollar, given that investors know Hurricanes Harvey and Irma will distort the data.

Fed speak will likely continue guiding traders, and Janet Yellen will again appear on Wednesday to deliver the opening remarks at the 21st Century Conference in St. Louis. Fed officials Robert Kaplan, Jerome Powell, Patrick Harker, and Bill Dudley, are all due to speak this week.  

About the Author

Hussein Sayed is chief market strategist at FXTM.