Growing risk in Catalonia
We continued to see an underpricing of Catalonia risk. Partially since markets tend to expect the least intrusive outcome and partially the market rumors that, this is merely a domestic issue. Meaning should Spain break up the EU will deal with both parties as separate entities. This is fake news and massive miscalculation. European commission issued a statement, which indicated should Catalonia ever leave Spain in a legal referendum; it would immediately be thrown-out of the EU. In a massive error, the callousness of the EU government by siding with Madrid despite the brutality on referendum Sunday, is likely to have Catalonia’s loyalty to the EU weaken. In our view the strongest argument for Catalonia to remain a part of Spain, a unified Europe, has now been squandered. Removing this logical argument opens up this struggle to extremes.
The regional government of Catalonia has issued general demonstrations for today, which is likely to harden both sides rather than relieve tensions. Empowered by the lack of consideration for the democratic process radical members of Catalonia government has called for unilateral declarations of immediate independence. The outlook for Span has got4en considerably more uncertain. Our expectation is for call for independence this week and possibly will trigger Article 155were the Madrid Government where they would take over regional policy and fiscal tasks. We remain bearish on the Euro in light of events in Spain and expect things to get worse before they improve. Break of 5-month uptrend at 1.1836 indicate bearish extension to 1.1660 August low.
RBA holds rate at record low
Earlier last night, the Reserve Bank of Australia has held rates unchanged AT 1.5% and this has triggered some slight weakness for the Aussie. It is the 14th consecutive months that rates remain unchanged. Central bankers declared that there are confident about growth picking up within a near future. RBA is definitely not in a hurry to tighten its monetary policy, especially since the Aussie stays strong.
Fundamentals remain somewhat mixed with low wages growth, which concerns the central bank’s members. Inflation is currently standing below 2%, just under the long-term inflation target of 2%-3%. Q2 growth printed at 0.8% q/q, which was a good improvement.
The AUD keeps on being strong. The pair dipped below $0.78 which is the lowest level in the last two months. Yet, we believe that upside pressures on the Aussie are set to continue due to the improving nature of the Australian economy and their strong exposure to gold & metals. Indeed, we consider that the precious metals’ prices are going to be driven higher because of increasing global inflation.
Risk of an RBI rate cut
On Wednesday the Reserve Bank of India (RBI), policy meeting will be key to EM pricing. It’s widely expected the RBI to hold rates unchanged however, there is a high probability of a surprise rate cut. India’s economic expansions has slowed significantly causing concern with policy makers. While drop in real interest rates despite rise in upward pressure on inflation, will force the RBI to act. Should the policy meeting stick expectations the tone of the statement will likely indicate that additional policy rate cut is on the table. Shift in tone or cut combined with narrowing US-India rate spread and uncertainty over EM reaction of fed policy will keep INR weak.
