USD and treasury yields better bid amid speculation about hawkish shift at the head of the Fed
The US dollar bounced back on Monday, extending gains against almost all of its peers. The uncertainty generated by the Catalan situation has also forced traders to pull out of the single currency. Over the last few months, the euro had won the favour of investors at the expense of the greenback, amid rising uncertainty in the US political outlook as well as lacklustre economic data. Now that Republicans seemed that have found a common about the much awaited tax reform, investors are more optimistic about the inflation and growth outlook in the world’s largest economy.
Last Friday, the release of disappointing PCE readings had only little effect on the investors’ optimism as both US treasury yields and the greenback quickly bounced back. The US 10-year sovereign rate rose to the highest level since July 11th, hitting 2.364%, while the dollar index returned to 93.60 after falling to 92.95 last week. One must be said that the speculations surrounding a potential shift at the head of the Federal Reserve, with the possible removal of Janet Yellen for a more hawkish candidate such as Kevin Warsh, has fuelled the yield rally.
We maintain our bullish on the US dollar as we believe the market hasn’t fully priced the upcoming rate hike together with the balance sheet reduction program, yet. However, we would stay cautious regarding further EUR weakness against the USD as another push, which can the take the form of a worsening of the Catalan situation, is needed.
Spanish vote triggers slight euro weakness
The Catalan referendum has brought a very important question in centre stage. Do people have in Europe the self-determination right? It seems that the answer is a big no. Spanish Prime minister declared that there was not vote (i.e. legal) vote in Catalonia. Anyway the police violence have been used and it definitely drove “No” voters to stay at home. As a result this has created this surprising result: 90% of Catalonians are in favour of the independence vote.
This is then weakening the Spanish central power and European nations are being weekend by regionalists. Amid the vote, the single currency has slightly declined but remained above 1.17 USD. We believe the impact of this vote won’t weaken the European Union. We rather consider that a weaker Spain would benefit to the European Union. European Union does not need nations.
According to us, the Catalonian vote won’t trigger a political crisis in Europe, even in the short-term. However this vote reveals the economic underlying difficulties of Spain. Catalonia is the richest region in Spain and is not accepting to “pay for everyone”.
