The risks for the euro, associated with the referendum in Catalonia, will be limited, analysts say. Riots in a referendum in the Spanish province forced investors to worry about the increased political risks in the euro area, which could increase pressure on the country’s debt. However, most strategists are confident that the impact of these events on the single currency rate will not be long. On Monday, the euro weakened against all its competitors except the pound, after the leaders of the Catalan separatists said that in the coming days they could declare independence unilaterally. The yield spread of Spanish and German bonds reached its highest since June. “Spain may face a constitutional crisis, but this is not an event that could jeopardize the level of integration in the Eurozone,” said Vasileos Gkyonakis, currency strategist at UniCredit Bank in an interview with Bloomberg Television. “The political risk” is far from as high as a couple of years ago, “the expert added, stressing that his forecast for the euro remains bullish.
Below are the opinions of some analysts about the euro and bonds:
Market reaction shows that the influence of voting “refers more to nonfactor risks and is more focused on relations between Spain and the EU as a whole,” Gkionakis said. A couple of years ago, talk was about “the disintegration of the Eurozone, and now we’re talking about a potential isolated constitutional crisis.” This vote could undermine the pace of implementation of structural reforms in Spain, but most importantly, economic data from the Eurozone remain strong. Despite the fact that the fundamental factors for the euro are not as strong as before, we continue to adhere to the bullish forecast for the single currency and believe that its fair value is in the region of $ 1.24- $ 1.25, Gkionakis added.
ING Groep NV
Recent political events in Germany and Spain have become a kind of test of how investors perceive political risks in the region, “notes Virah Patel, currency strategist at ING. “The return of populist sentiments reminds that the political risks for the euro have not yet disappeared, especially in the light of the forthcoming elections in Italy, which will take place early next year,” the expert said. This may be a cause for concern for medium-term investors, although any signs of fading confidence in the recovery of the European economy may also halt the cyclical upswing of the euro. The story of the normalization of the ECB policy is supported by the euro. Unlike previous cases, when political risks flared in the region, we can now see that the main focus is on the prospects for tightening the policy of the Central Bank. Against this background, the euro / dollar pair should get support around 1.17, although a break of this level may cause a deeper bearish correction in the direction of zone 1.15-1.16, according to ING.
If investors can classify Catalonia as a local problem in Spain, then the euro / dollar will return to the mainstream of the bullish trend, believes Peter Chatwell, head of the interest rate strategy at Mizuho. The Spanish economy is in very good shape, so the uncertainty at the level of the national government should not entail large-scale negative consequences from the macroeconomic point of view. The dynamics of the euro / dollar is probably the most accurate indicator of current market sentiment regarding side risks for the euro. Keep track of the level of 1.1715, which is an important technical support. Anthony Bouvet, an interest rate strategist at Mizuho, believes that there will be some discomfort in the markets, and in the short term, further expansion of spreads is possible. However, in the longer term, the expert predicts a subsequent narrowing of the spreads.
Credit Agricole CIB
Despite the fact that on Monday the euro weakened in response to the results of the Catalan referendum, in the future we do not expect that the recent events will have a significant impact on the market, say currency strategists, including Manuel Oliveri. Guides of the single currency will be expectations about the monetary policy of the ECB, as well as the attitude to risk at the global level. And since the growth rate of the region’s economy remains quite high, supporting the ECB’s more “hawkish” attitude, the euro remains attractive for purchases on recessions. We recommend staying in long positions for EUR / USD and EUR / CHF.
“The situation in Spain” turned out to be more complicated than many assumed, including us, “admits Christophe Rieger of Commerzbank. However, given the global interest in risk and inspiring makrostatistiku, the impact of this factor will be limited. According to the expert, the spread expansion of the yield of Spanish bonds against the German “does not look alarming”. In the near future, Catalonia will definitely dominate the news headlines, but more important events in the longer term will be concentrated in Germany / the EU and Italy.
Societe Generale SA
Risks point to the prospect of further expansion of the bond yield spread, says Georges Garayo, a strategist at fixed income markets in Societe Generale. Garayo does not have an official forecast for the next few weeks, but stresses that the spread on the 10-year state. bonds of Spain / Germany can expand to the lower limit of the range 1.40-1.30, although there are risks of more large-scale movements. “It is difficult to imagine the narrowing of the spread from the current levels in the short term, as well as the resolution of the Catalan problem in the near future,” the expert added.