Euro Ruffled by Spanish Uncertainty

Daily Analysis - 02/10/2017

Catalonia Referendum Results Spook Investors

The Euro fell against the US dollar in Asian trading after the weekend’s Catalonia referendum showed overwhelming support for secession from Spain. The Euro fell by as much as 0.40% after the violence-marred polls, with liquidity thin given national holidays in China and South Korean.

Catalonia Situation Grim as Police Crackdown Turns Violent

Spanish police used rubber bullets to disrupt an independence vote in Catalonia on Sunday, leaving hundreds of citizens injured while presenting Madrid with a huge challenge as its seeks to ease tensions in the wealthy north-eastern region. Preliminary results showed that of the 2.20 million ballots counted, 90% were in favour of a split. Spanish Prime Minister Mariano Rajoy has denounced the vote as illegitimate.

Meanwhile, the dollar was boosted by speculation surrounding US President Donald Trump potential Federal Reserve Chair picks to succeed Janet Yellen. Former Fed Governor Kevin Warsh has been circulating as a potential front-runner for the position. Warsh is widely-considered to be more hawkish than current head Janet Yellen. EURUSD is trading around 1.1760 early Monday, with 1.1750 representing the immediate downside support. Considering the short-term trend has turned bearish, a breach of this level could see selling pressure intensify.

Chinese Manufacturing Activity Picks Up

Momentum in the Chinese manufacturing sector increased sharply in September, with big factories cranking up production while allaying fears that the economy might slow ahead of a key Communist Party meeting in mid-October. China's official manufacturing PMI rose to a five-year high of 52.4 last month from 51.7 in August according to data released by the National Bureau of Statistics on Saturday. The figure easily topped market expectations of 51.5 and kept the index above the 50-threshold that separates growth from contraction for the 14^th-straight month.

The statistical agency attributed the surge to consumer-goods makers ramping output ahead of the Golden Week national holiday that began October 1^st. Separately, the Caixin China manufacturing PMI, which more closely tracks smaller private firms, slipped to 51.0 in September from 51.6 in August. USDCNH was last seen around the 6.6675-mark.

Canada Records Narrower Deficit

Canada's budget gap tightened in July from a year ago on a substantial increase in income and sales-tax revenue. The Finance Department's monthly fiscal monitor publication issued on Friday showed that the country posted a July budget deficit of CAD 193.00 million ($155.00 million), compared to a deficit of CAD 1.76 billion in the same period last year. Revenue jumped 12.80% in July from a year earlier amid higher intakes from both corporate and personal taxes.

Separate data from Statistics Canada revealed that producer prices rose 0.30% in August amid higher costs for energy products, but nevertheless fell short of economists’ forecasts for a gain of 0.50%. The July figure was downwardly revised to show a drop of -1.60% from the originally reported -1.50% decline. With the tailwinds from the US dollar, USDCAD continues to gain ground in Monday morning trade, edging back above 1.2500.

Japanese Business Confidence Climbs to 10-Year High

Confidence among Japan's large manufacturers rose to a 10-year high in the three months to September as the economy enjoyed its best run in over a decade, helped by a revival in consumer spending. The Bank of Japan's Tankan quarterly survey unveiled earlier showed that the primary index, measuring sentiment among large manufacturers, climbed to 22 during July-September from 17 in the prior quarter to hit its highest point since September of 2007.

The reading compares with a median forecast of 18 taken from a Wall Street Journal poll of economists. The upbeat data supports hopes from Central Bank officials that a sustained economic recovery will lift wages and spending, helping accelerate inflation towards the ambitious 2.00% target. The USDJPY pair is currently hovering around 112.900, off the highs reached earlier in the session.