All eyes on Spain
While the German elections (still a non-issue) continues to dominate Europe conversation, events in Spain are about to heat up. Where this story takes markets, confounds and worries this strategy desk. The Catalonia referendum on Independence is plan to take place on Sunday 1st October. The Sunday vote will ask Catalans if they would support a separate state from Spain. Based on the 1978 ‘unity’ agreement the Spanish constitutional court has ruled the referendum illegal. The regional government remains committed holding a vote while Spain central government has increase efforts to eliminate any trace of a referendum including confiscating by force ballet boxes, shutting down social media site and detaining regional political figures. Markets are betting that the efforts by the Central government to stymie representative results will delegitimize any Sunday ballot. Yet these efforts by the Central Government in our view will most likely backfire as the Catalonian that do find a way to vote (eliminating balancing vote of opponents of independence) in a board majority vote for succession. A similar pattern witnessed in the ‘non-binding’ referendum in 2014. To defuse tensions, there has been signals from both sides that discussion for a calmer resolution are on the table. Offers to the Catalan government of a new financial constitution will address a primary point of contention. But overall we have the feeling passions are running high, were suggestions of future talks will not appease the Catalonians. Markets are not pricing in any risk for Sunday as short-term EURUSD implied volatility are actually lower then longer term. We would be wary of hold spec positions over the weekend as truly all things are possible in Barcelona.
CHF strengthens against Catalonian vote backdrop
The Helvetic currency has lost two figures since the start of the week going from 1.16CHF to 1.14CHF. Some Swiss economic indicators came in better. The UBS Consumption indicator has risen in August from 1.38 to 1.53. This morning the KOF Leading Indicator, an indicator trying to predict the future of the Swiss economy, has also risen.
Economic indicators are showing good optimism on the Swiss economy and markets tends to also adjust their optimism on the single currency which explains, in our view, the current decline in the EURCHF.
The EURCHF is also largely driven in the short-term on European political issues. The Catalonian vote is definitely a thorn in the side of the European Union which tend to be above nations. We believe that the right for self-determination will become a key issue in the Future of the European Union and as a result will continue weighing on the single currency. On top of that, we also consider that markets are still overly optimistic regarding the future tightening of the ECB.
In the short-term, we should nonetheless see the euro rising again the CHF as there are decent likelihood that Madrid invalidates the Catalonian vote.
