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Is Catalan referendum underpriced?
The EURUSD benefits from some profit taking after a week of losses due to a surprise German election outcome. The pair traded at 1.1801 into the European open.

Yet, the euro-bias remains on the downside as the Catalan referendum is an event risk that many traders may want to avoid before the weekly closing bell. The confusion reigns before Sunday’s vote, provided that the Spanish government is trying to block the referendum claiming that it is illegal.

Interestingly, there are no signs of anxiety in the Spanish stock, bond and sovereign markets. It could be because the market is not pricing in the risks, and/or investors were dealing with other major issues such as the German election and the European Central Bank (ECB) monetary policy, that the Catalan referendum has been given little time to reflect into the cross-asset prices.

If the referendum is held as planned, the outcome could trigger some price volatility in the euro markets on Monday. A vote in favour of Catalan independence could weigh on the European integrity sentiment and hit the euro at next week’s open. In addition, the government’s reaction is important. Protests, a heavy-handed police intervention and political unrest could affect the euro-appetite in the aftermath of the Sunday’s referendum. On the other hand, a no vote should give a better colour to the single currency. Given the light risk pricing across the euro markets, the rally could remain short-lived.

According to a poll directed by the Centre for Opinion Studies in June, the yes voters dropped to 41.4%. Things may have changed since then. Grexit and Brexit votes remind us that every outcome is possible.

FTSE relies on softer pound

Cable rebounded from 1.3343 on Thursday. The key Fibonacci support area stands at 1.3344 / 1.3320 (major 61.8% retracement on post-Bank of England (BoE) rally & major 38.2% retracement on August – September rise) and should continue providing good support to the pound. Meanwhile, the MACD (Moving Average Convergence Divergence) index turned negative and could limit the upside potential nearing the $1.35 level.

The FTSE 100 pushes higher on the back of a softer pound and firmer oil prices. Energy (+0.17%) and mining stocks (+0.57%) are well bid, while financial (-0.04%) and IT stocks (-0.57%) traded on the back foot at the open.

A strong week for the US dollar

The stronger US dollar has been the key driver of the currency markets this week. Hawkish Federal Reserve (Fed) expectations, combined to Trump’s tax reform plans and the solid US economic data gave a positive spin to the US dollar throughout the trading week. The 2Q GDP data beat estimates on Thursday. The US GDP grew by 3.1%q/q annualized in the second quarter versus 3.0% expected by analysts. The US 10-year yield consolidated above 2.30%. The US stocks had a marginally positive session. The Dow Jones (+0.18%) and the S&P500 (+0.12%) traded in the green. The VIX index fell to 9.55%, hinting at no signs of anxiety, or no interest in hedging the long equity positions in the US markets.

Next week could see some profit taking as the Trump’s new tax plan should bump into some resistance in the congress. In fact, the tax proposal lacks major details; the financing of the massive overhaul being one of them.

The US equity futures were flat on Friday, hinting at a sideways open in New York.

Gold rangebound

Gold consolidates below $1’290. Trend and momentum indicators are comfortably negative and the next bearish target stands at $1’272 (200-day moving average). However, the precious metal found buyers below the $1’280 mark on Thursday. The Catalan referendum risk and North Korean tensions could lend a solid ground by $1’277/1’275 before the weekly closing bell.

Japan’s inflation improved to two-year high

The USDJPY remained well bid above 112.20 in Tokyo. The inflation ex-fresh food (monitored by the Bank of Japan (BoJ)) improved from 0.5% to 0.7% year-on-year in September, as expected by analysts. Still, the Japanese price dynamics are far from the BoJ’s 2% inflation target. The BoJ-doves should remain in charge of the market. The Fed/BoJ policy divergence plays in favour of a stronger USDJPY.

Soft GDP data, stagnant oil prices could further hit the Loonie

The USDCAD traded past 1.25 on Thursday. Canada will release the July GDP data later in the session. Analysts expect a softer month-on-month expansion (0.1% vs 0.3% printed a month earlier). The yearly GDP may have eased to 3.9% from 4.3% printed previously. Soft data and a further downside correction in the oil markets could lead to a weekly USDCAD close above the 1.25 mark.

The Brent – WTI spread has widened in Asia. Moody’s said shale drillers and oil sands producers need the price of a barrel consistently above $50 for their businesses to be viable in the long-run. The Canadian oil sands producers are still at risk of cheap oil prices.

AUD in the hands of sellers

The AUDUSD rebounded from 0.7800-support on the back of a mystery spike in copper futures. Top sellers rapidly jumped in.

The lack of risk appetite could spoil the recovery in the carry pairs, however the absence of anxiety could also bring in some risk takers as soon as signs of exhaustion on the US dollar rally become apparent.

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