Europe averted the worst of fears last week when Catalan President Puigdemont suspended a declaration of independence in an attempt to open dialogue with the Spanish government.^{5, 6, 7} With the immediate crisis averted the euro found a steady flow of relief buying, helping the common currency rebound from 6 week lows.²² Puigdemont must now clarify his stance to the central government by Monday, but the balance of powers seems to have broadly shifted towards Madrid aided by the support of central EU figures and key Catalan businesses.^{5, 6, 7} Markets appear to have discounted the worst of the crisis in Spain but a light economic calendar this week means the euro remains heavily exposed to any political surprises, keeping the common currency tentatively in check.

Divorce negotiations between the UK and the EU have made little progress according to the EU’s Chief Brexit Negotiator last Thursday.² The latest comments come as UK Prime Minister Theresa May faces growing political dissent at home, complicating her proposed transition deadline as well as her tenure in office.^{3, 4} The suggestions that a no-deal Brexit may yet again be plausible pose a risk to the pound especially as the economic drawbacks of Brexit begin to surface.²³ Crucial data on inflation, employment, and consumption are set for release this week, the results of which may guide the Bank of England’s next decision on a rate hike.²⁴

Consumer prices and retail sales out of the US missed estimates last Friday, boding poorly for the troubling inflation outlook.^{23, 24} Indeed, Fed minutes from the September meeting showed many officials concerned that low inflation “might reflect not only transitory factors.”⁸ While the dollar sharply dropped on the release, a December hike remains almost certain as implied by the central bank’s cues and market priced odds.²⁵ Less certain has been the future of leadership at the Fed and details of tax reforms promised by the administration. Coupled with President Trump’s latest assaults on Obamacare and the Iran deal, the various unknowns have dollar traders in an anxious spot heading into the week.^{14, 19} Politics aside, a few fed speeches this week, including one this Friday by Fed Chair Janet Yellen, can act as potential risk drivers for the dollar.²⁴

Canada and Mexico engaged in the fourth round of NAFTA talks with the US last week; the two countries hoping to preserve the framework of the deal against President Trump’s threats. Once the best performing currency of the year, the Mexican peso has now fallen over 5% over the past three weeks as a result of NAFTA troubles and its own upcoming elections.^{16, 17} As talks progress markets will look forward to Canadian inflation and consumption data due this Friday. Bank of Canada officials have tempered rate expectations in recent weeks warning of a stronger exchange rate and NAFTA uncertainties while the latest inflation and consumption figures proved disappointing.^{20, 23, 24} Should this Friday’s reports miss, markets should heavily discount the chance of further action by the Bank of Canada this year.

High yielding currencies out of the Asia-Pacific performed well last week, with the Australian dollar, Indian rupee, and Chinese renminbi all appreciating against the dollar.^{22, 23, 24} The gains break a nearly one month decline for the currencies against the dollar as the ever important driver of economic activity in the region—China—released trade statistics last Thursday showing a still robust demand for imports.^{16, 21} As such, it appears regional trade remains supportive of Asian currencies for now, likely leading to a continuing drawback of the prior month’s depreciation.²² Meanwhile, USD/JPY failed to push past 113 last week and succumbed to profit taking as the crisis in Europe mediated and global equities rallied.¹³ Chinese GDP and industrial production released this Wednesday should provide further clarity on the Asian business cycle, with regional FX taking cues from the data.

Sources:

1.https://city.wsj.com/articles/b37730d3-2fc4-4e88-8288-fcbeb6134b14

2.https://www.wsj.com/articles/eu-brexit-negotiator-says-not-enough-progress-to-recommend-next-phase-in-talks-1507807189

3.https://www.wsj.com/articles/u-k-s-may-battles-coughing-fit-and-prankster-in-conference-speech-1507124220

4.https://www.wsj.com/articles/legal-intricacies-complicate-mays-two-year-brexit-transition-period-1507740671

5.https://www.bloomberg.com/news/articles/2017-10-11/inside-his-palace-catalan-chief-puzzled-how-to-avoid-checkmate

6.https://www.bloomberg.com/news/live-blog/2017-10-10/catalan-president-carles-puigdemont-addresses-lawmakers

7.https://www.bloomberg.com/news/articles/2017-10-13/puigdemont-pressured-by-separatist-allies-as-catalan-clock-ticks

8.https://www.cnbc.com/2017/10/11/fed-minutes-december-rate-hike-all-but-certain-despite-low-inflation.html

9.https://www.bloomberg.com/news/articles/2017-10-13/pena-nieto-trudeau-pledge-trade-unity-as-trump-threatens-nafta

10.https://www.wsj.com/articles/mexican-peso-droops-amid-nafta-talk-troubles-1507744820

11.https://www.bloomberg.com/news/articles/2017-10-11/mexican-peso-traders-pile-into-hedges-as-election-talks-heat-up

12.http://www.econoday.com

13.https://www.cnbc.com/2017/10/13/us-stocks-earnings-season-wall-street.html

14.https://www.bloomberg.com/news/articles/2017-10-13/trump-s-latest-obamacare-killer-will-cost-uncle-sam-194-billion

15.https://www.bloomberg.com/news/articles/2017-10-13/pena-nieto-trudeau-pledge-trade-unity-as-trump-threatens-nafta

16.https://www.bloomberg.com/news/articles/2017-10-11/mexican-peso-traders-pile-into-hedges-as-election-talks-heat-up

17.https://www.wsj.com/articles/mexican-peso-droops-amid-nafta-talk-troubles-1507744820

18.https://www.cnbc.com/2017/10/12/china-reports-september-exports-import-trade-data.html

19.https://www.bloomberg.com/news/articles/2017-10-13/trump-expected-to-disavow-iran-nuclear-deal-but-not-abandon-it

20.https://www.reuters.com/article/us-canada-cenbank/dovish-bank-of-canada-signals-rate-pause-after-back-to-back-hikes-idUSKCN1C22BW

21.BOA Mercury

22.Trading View

23.Barclays / 4castweb

24.Econoday.com

25.http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html