Dollar Retains Firm Tone, Spanish Markets Stabilize

Firm US interest rates and a strong manufacturing ISM yesterday helped support the greenback, while disappointing construction PMI in the UK weighs on sterling. The euro briefly slipped below $1.17 in Asia for the first time in six weeks. It has recovered toward the highs seen in North America yesterday (~$1.1760).  

There are several euro option strikes that may be in play today. In the euro, between $1.1750 and $1.1775, there are nearly 2.9 bln euros in options that expire today. And there are another nearly 900 mln euros struck at $1.18.  

Back-to-back weekend political developments in Europe have helped take the shine off the euro, alongside the greater confidence of a December Fed hike. The CDU won in Germany, as widely anticipated, but rather than a new Grand Coalition with the SPD, and now coalition with the FDP and Greens appears necessary. It may take the rest of the year to put into place. At the same time, the cost of the FDP participation, as well as the exposed right-flank of the CSU in Bavaria, could make for a Germany less inclined to push ahead with new post-Brexit, post-financial crisis integration, which Macron as proposed.   

This past weekend, Spain’s Catalonia region went ahead with a secessionist referendum that was ruled illegal by the Supreme Court. The low-level efforts of Madrid to hamper the referendum, and enforce the law, such as confiscating ballots, escalated to outright physical force to disrupt. The risk is now either a government crisis, where Rajoy, who leads a minority government, is forced to retreat or resign or a constitutional crisis.  

Reports suggest Rajoy is considering invoking a 1978 constitutional article that lets Madrid revoke Catalonia’s regional status. Rajoy’s coalition partner, the newly-formed center-right Ciudadanos, supports such action, while the opposition Socialists favor talks with the secessionists, but not taking the more provocative step. Meanwhile, the Catalonia still seems to be pushing ahead with their independence.Things may come to a head on October 6, which is the anniversary of the execution by Franco of a leader of the Catalonia’s independence movement.