Euro Weakness From Catalan Vote May Be Limited, Say Strategists

  • Independence bid not a full-blown euro-area crisis: UniCredit
  • ECB policy should keep EUR/USD supported around 1.17: ING

The risks to the euro stemming from Catalonia’s independence bid should remain contained -- for now -- according to analysts.

The violence that accompanied Sunday’s unconstitutional referendum in the Spanish region has increased investor concern about rising euro-area political risks and could put further pressure on Spanish debt, according to strategists, even as most of them don’t see a long-lasting impact on the common currency.

The euro slid against all of its major peers barring the pound on Monday after Catalan secessionist leaders in Barcelona signaled they may unilaterally declare independence within days. The spread between 10-year Spanish and German bond yields reached the widest since June.

“Spain is potentially facing a constitutional crisis, but it’s not something that threatens the degree of integration for the euro zone,” Vasileios Gkionakis, co-head of strategy research at UniCredit Bank SpA, said in an interview with Bloomberg Television. The political risk “is nowhere near as steep or troublesome as it was a couple of years ago,” he said, adding that he remains bullish on the euro.

Here’s a roundup of some analysts’ views for the euro and bonds:

UniCredit

  • The market reaction shows the impact of the vote is “more of an idiosyncratic risk, more concentrated on Spain as opposed to the European Union in general,” says UniCredit’s Gkionakis
  • A couple of years ago the talk was of “a disintegration of the euro zone, now we’re talking about an isolated potential constitutional crisis”
  • While the vote could hamper the pace of structural reforms in Spain, economic data in the euro area have been strong
  • Gkionakis says while the “the fundamental tailwind is definitely not as strong as it used to be” for the euro, he remains bullish and sees fair-value at $1.24-$1.25

ING Groep NV

  • Recent political developments in Germany and Spain have provided a “reality check on the way investors view euro-zone political risks,” says Viraj Patel, a currency strategist at ING
  • “The return of the ‘populist voter’ sentiment is a reminder that political risks haven’t completely abated for the euro -- especially with the specter of the possibly more contentious Italian elections looming in early 2018”
    • This may be more of a concern for medium-term real money investors, though any fading in the confidence of the euro-area economic recovery could also see pause in the cyclical euro upswing
  • ECB policy normalization story “provides a backstop to the euro. Unlike prior occasions when European political risks have flared, we now have the tailwind of an ECB looking to tighten -- or normalize -- monetary policy”
  • This should keep EUR/USD supported around 1.17 -- although a break of this could see a deeper technical correction toward 1.15-1.16, ING says

Mizuho International

  • If investors can “compartmentalize Catalonia as being a local issue for Spain, then EUR/USD should revert to the bullish trend,” says Peter Chatwell, Mizuho’s head of European rates strategy
    • This will “support all EUR rates assets, as the ECB will likely need to be much slower in reducing QE, postponing rate hike expectations”
  • The Spanish economy “is in very good shape, so uncertainty at the national government level should not be too damaging from a macro perspective”
  • EUR/USD is probably the “clearest indicator of current market sentiment to EUR tail risks. Watch 1.1715 as an important support”
  • Antoine Bouvet, an interest rate strategist at Mizuho, says markets will remain “uneasy,” and in the short-term there could be more widening of spreads
    • In the longer-run, however, Bouvet sees more tightening and “would be keener to buy after a widening than putting on spreads wideners”

Credit Agricole CIB

  • While the euro started Monday on a weak footing after the Catalonia vote, “looking ahead, we do not expect the latest development to have sustainable market impact,” say currency strategists including Manuel Oliveri
  • Global risk sentiment and ECB monetary policy expectations should drive the shared currency
  • While growth momentum remains strong enough to support a more hawkish ECB stance, it remains attractive to buy EUR dips
  • Keep long EUR/USD and EUR/CHF as trade recommendations

Commerzbank AG

  • The situation in Spain “is a bit more messy than most had thought, including us,” says Christoph Rieger, head of fixed-rate strategy at Commerzbank
    • Given the “global risk-on backdrop and encouraging macro situation, however, the fallout should stay limited”
    • Rieger said a five-basis point widening of Spanish bonds versus bunds “is not very alarming”
  • Catalonia “will clearly dominate the headlines near-term, but the more important longer-term developments will be Germany/EU, and Italy”

Societe Generale SA

  • The risk bias is toward more spread widening, says Jorge Garayo, a fixed-income strategist
  • While Garayo doesn’t have an official forecast over the next few weeks, there may be some “moderate widening in the spread toward the low 1.30s in 10y SPGB-Bund, but of course the risks are biased toward a larger move”
  • It is “hard to see a tightening of the spread from current levels in the near term just as it is hard to see a near term resolution of the Catalan problem”

— With assistance by Guy Johnson

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