Good morning,

EUR: Madrid vs Barcelona

Madrid and Spanish Prime Minister Mariano Rajoy enacted Article 155 of the Spanish constitution over the weekend allowing the central government of Spain to take control of the rebel region. Leaders within the Catalan parliament are set to meet today to discuss their response with calls once again that independence could be officially declared by the end of the week.

EUR hasn’t really reacted through the Asian session and is down a touch against the pound and dollar this morning although the table is set for additional losses. Most newspapers were filled this weekend with pieces on other parts of the EU that fancy independence from their larger countries and while some may have had their day (Scotland, the Basque country) others are either openly emboldened by the Catalan movement (Wallonia in Belgium) or making noises that we haven’t heard in years (Bavaria).

The Spanish government has cut its growth forecast for 2018 courtesy of the Catalan issues but for now the issues remain a Spanish problem with occasional effects on the single currency. Traders are much more likely to be exorcised by Thursday’s European Central Bank meeting which should see the Bank begin to wind down its asset purchase program by tapering the amount of government and corporate debt that they buy every month. .

JPY: Abe powers up

The ruling coalition of Shinzo Abe won the snap election on Sunday night to maintain its super majority grip on Japanese politics. Abe needed 233 seats and won 310 and so will likely be emboldened to drive his reform agenda into the next gear. From an international perspective that means rewriting parts of the Japanese constitution to allow Japan to go to war following 70 years of constitutional pacifism. From an economic and currency point of view we believe that Abe will keep current Bank of Japan Governor Kuroda in a job although another impulse of Abenomics stimulus could need a more dovish Bank of Japan governor.

For now, this could be the end of near-term JPY weakness.

USD: Trump remains confusing on tax and the Fed

President Trump was at his imprecise best over the weekend when asked about nominations for the job of the Chair of the Federal Reserve. Trump told reporters “most people are saying it’s down to two – Mr. Taylor and Mr. Powell. I also met with Janet Yellen, who I like a lot, I really like her a lot. So, I have three people that I’m looking at, and there are a couple of others. I’d say I will make my decision very shortly.”

The confusion continued on taxes with the top US Senate Republican and the White House’s budget director saying on Sunday that they were aiming for a US tax reform package by the end of the year. President Trump, meanwhile, voiced support for a higher tax bracket for wealthy Americans in an interview with Fox News.

Dollar will take a slight back seat this week as we wait on news from the ECB although tax and Trump can always send us spiralling.

Have a great day

Jeremy Cook, Chief Economist