Market Drivers September 28, 2015

Catalonia votes pro-independence
Cable finds relative strength
Nikkei -1.32% Europe -0.34%
Oil $45/bbl
Gold $1137/oz

Europe and Asia:
No data

North America:
USD PI/PS 8:30

USD Pending Homes 10:00

It’s been a quiet night of trade on the opening night of the week in the currency market with risk aversion flows dominating trade in early European trade. The euro was was also mildly lower in the aftermath of pro-independence vote in Catalonia.

Catalonia voted for a pro-independence parties in Sunday’s vote setting up for a conflict with the national government in Spain. Catalonia represents about 25% of all Spanish exports and is one the most important economic regions in Spain. The region has become a hotbed of separatism as the Catalans are not happy with the tax policy from Madrid which they claim forces them to provide an unfair amount of wealth transfers to the rest of the nation.

The win last night provided the Catalan pro-independence parties with a slim majority in Parliament and paved the way according to their leader Artur Mas with the way towards independence.

However, the path towards any real separation is quite a long way away and will no doubt be fiercely opposed by the authorities in Madrid. For now the markets appeared to be only mildly concerned with such a scenario and EUR/USD was only a few pips lower than the Friday close. But as always the political stories in Eurozone start at the periphery and then suddenly blow up to become all consuming affairs for the market.

The EZ fracture theme does not appear to be going away and in fact is actually strengthening as UK now also faces the prospect of separation vote. For now the polls show the voters in UK evenly split with about 17% of the electorate undecided. And here again risk could tilt to the downside if voters becomes disaffected with the union.

For now the markets remain complacent about any macro risk from the political discontent in Europe, but the polls and the voting patterns clearly show discontent under the surface that could become a much bigger problem for European authorities over the next few months. This is yet another reason why we think the current rebound in the EUR/USD remains nothing but a short covering rally as the risks in the pair remain to the downside.

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