Catalonia’s separatist calls give a negative picture for the euro: traders
The euro does not look like an attractive option in the short-term given political uncertainty in regions like northeastern Spain, currency strategists told CNBC on Monday.
“The Spanish situation is still too fluid to predict, but like the German result, the PR disaster faced by Madrid and (Prime Minister Mariano) Rajoy’s minority government are not reasons to be buying euros here, especially with the leveraged money community already long of euros,” Stephen Gallo, European head of FX Strategy at the Bank of Montreal, told CNBC via email.
The common currency was 0.6 percent lower against the U.S. dollar at 12:30 p.m. London time Monday as traders worried over an independence vote in Spain. The instability in Catalonia is a major concern for the fourth largest euro zone economy, given that the region contributes to about 19 percent of the entire economic growth of Spain.
According to Catalonian authorities, 90 percent of people voted in favor of independence on Sunday, but the national government said the referendum was illegal. More than 800 people were injured during clashes with the police, which tried to prevent people from voting. Rajoy has been criticized by the way his government has dealt with the referendum, by ordering the removal of campaign materials, ballot boxes and the use of police.
But, as well as Spain, the euro-dollar currency cross was also impacted by rumours of a potential hawkish name as next chairman of the U.S. Federal Reserve. At the same time, traders are still digesting the outcome of the German federal election, which resulted in a weaker government for Chancellor Angela Merkel.
Merkel is seen as a key figure in European politics, and is currently negotiating with other political parties on ways of forming a new coalition government. Given their differences, some political experts fear that there will not be a new executive in place until next year.
Lothar Mentel, chief investment officer at Tatton Investment Management, told CNBC on Monday he does not see much upside potential for the euro in the shorter term.
“Over the longer term the euro is still a good place to be – or at least, unless (President Donald) Trump succeeds with his tax reform. If he gets it through, then a reassessment would be necessary,” he said.
Pledges from Trump to overhaul the tax system could push the dollar higher, thus depreciating the euro. However, at the moment there are fears he might not gather enough support to fully realize the changes. The political uncertainty in the U.S. is also making traders anxious on the dollar.
“We like the USD lower on a medium-term basis … But given the confluence of short-term factors we are faced with, we’re still likely to wait before stepping in and selling,” Gallo told CNBC.
These short-term factors include: unclear payrolls data due to weather effects, uncertainty over the leadership of the Fed and comments of a potential 10 percent repatriation tax for U.S. firms, according to Gallo.
“We are waiting. We’re not selling USDs here just yet,” Gallo added.
Source: CNBC
