All Steady in FX Despite Political Tension

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Market Drivers October 16, 2017
Chinese inflation hotter
Catalonia, Brexit talks on deck
Nikkei 0.69% Dax 0.07%
Oil $52/bbl
Gold $1302/oz.

Europe and Asia:
CNY CPI 0.5% vs. 0.4%

North America:
No Data

FX markets were very slow on the first trading day of the week, with little newsflow to nudge pairs from their well-established ranges on Friday. The dollar was slightly better bid but USDJPY continued to have difficulty crossing the 112.00 barriers as early morning Asia session rally fizzled into the afternoon.

The euro remained under slight pressure as all eyes were on Catalonia, where markets anticipated an announcement by Catalan independence leader Carles Puigdemont on whether he declared true independence from Spain. Early reports suggest that Mr. Puigdemont will ignore the direct question and will simply continue to make the case for greater Catalan autonomy. However, if the crisis escalates and Madrid refuses to accept Mr. Puidgemont’s wordplay then Catalonia will have only until Thursday to withdraw its declaration or face being put under direct Spanish rule.

For now the markets remain remarkably nonplussed about a situation that could quickly get out of hand and turn violent, should Madrid begin to exert military authority over the region, but FX traders are clearly under the belief that the two parties will work out some sort of face-saving compromise, given Catalonia’s economic importance to the country and the general sense of disarray that a true independence would cause. The EURUSD continued to hug 1.1800 figure for most of the Asian session trade ignoring the headlines so far.

With no economic data on the docket, Monday trading may remain subdued unless markets were rocked by some sort of geopolitical news and currencies are likely to take their cues from fixed income flows, particularly US yields. After topping out at 2.37% last week, US yields on the benchmark 10-year bond are now below the 2.30% and unless they rally above that level, it’s difficult to see how USDJPY could climb above 112.00

Although fixed income markets have essentially priced in a rate hike in December, the curve in 2018 look considerably more problematic with further rate hikes still garnering less 50% probability from Fed futures markets. This lackluster sentiment continues to weigh on the buck and continues to keep FX markets at a standstill as currency traders await the next catalyst to move prices.

Boris Schlossberg
Managing Director

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