‘Catalexit’ to crater the Euro, boost the CHF?
By Yann Quelenn
Euro speculators will want to close out their positions ahead of Sunday’s proposed independence referendum in what still is Spain’s Catalonia. All things are possible: a win for ‘Catalexit’ or even a shutdown of voting by angry officials in Madrid…olé! Markets are not pricing in any risk for Sunday: short-term EUR/USD implied volatility is actually lower than long term!
For the Swiss franc, a vote to break from Spain will brake its slide versus the Euro. Besides, we think markets are overly optimistic about the European Central Bank’s future tightening of the Euro. Moreover, the CHF has started to backtrack its losses, strengthening this week from 1.16 CHF to 1.14 CHF per Euro. Swiss economic indicators look robust: the UBS Consumption indicator rose in August from 1.38 to 1.53, and this morning the Swiss Economic Institute’s (KOF) Leading Indicator reported a rise.
The Catalan story confounds and worries us. Based on a 1978 ‘unity’ agreement, the Spanish constitutional court has ruled the referendum illegal. Catalonia’s government insists on holding a vote, while Spain’s central government has resisted fiercely, confiscating ballet boxes, closing social media sites and detaining Catalan officials. Markets are betting that this shutdown will delegitimize the Sunday ballot, however it comes out. Yet the crackdown might bring about the opposite effect. By eliminating ‘remain’ voters, the referendum will tip toward succession. This is what happened in the ‘non-binding’ referendum of 2014.
There are some signals of concession. Offers to the Catalan government of a new financial constitution will address a primary point of contention. Sill, passions are high, and promises of future talks might not be enough to appease the Catalans.