Catalonia: Traders Exit Euros for Safe-Haven Yen and Franc

The Euro is tipped to remain under pressure heading into the weekend as traders appeared to be taking risk off the table in response to an escalation in the Catalan independence crisis.

Europe’s common currency whipsawed against the greenback and Sterling while remaining in the red against the safe-haven Japanese Yen and Swiss Franc Thursday as the latest developments emerged from Catalonia.

Markets were shaken into life on news Spain's government is to trigger Article 155 of the Spanish constitution imminently and wrest control of Catalonia from its regional authorities.

Catalan leader Carles Puigdemont has meanwhile threatened to hold a vote in the regional assembly that could result in a unilateral declaration of independence.

“While Catalonia tried to be as equivocal as possible, a sign that perhaps they really wouldn’t like to go for independence if at all possible, Spain has clearly had enough, invoking Article 155, which will be activated at the weekend and will then proceed through its various stages in the Madrid parliament,” says Chris Beauchamp, Chief Market Analyst at IG.

The impact on the Euro - while not eyewatering - was nevertheless discernable.

“EUR remains under some mild pressure from periphery politics. Catalonia is still in the headlines, with the Spanish government apparently keeping a tight chokehold on Catalan nationalists and not looking in any mood to compromise,” says Shahab Jalinoos, a strategist at Credit Suisse.

Leaders of the Northern province were given a deadline of 10:00 am Thursday to renounce their earlier threat of a unilateral declaration of independence or face Madrid’s invocation of Article 155 of the Spanish constitution.

This would result in revocation of Catalonia's limited autonomy and Madrid seizing control of its regional government functions, which many have feared will reignite the civil unrest seen during the recent referendum.

The deadline lapsed without event on either side, leading to a sharp drop in the Euro relative to Dollar and many of its other major counterparts, particularly safe havens such as the Japanese Yen. 

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“In the absence of a reply in these terms, therefore, it is clear and precise, the Government understands that it has not responded to its request and will therefore continue with the procedures provided for in Article 155 of the Constitution with the objective of restoring legality in Catalonia,” the Madrid government responded, in a statement.

With Spain setting its sights on the invocation of Article 155 the Catalan leader Carles Puigdemont told the regional parliament, in response, that if Spain continues to avoid dialogue or goes ahead with any move to seize control of the local administration then it could result in the Catalan administration voting for a unilateral declaration of independence.

The Catalans have spent the recent fortnight seeking to use the outcome of October’s referendum to force Madrid into talks over a managed separation or greater autonomy for the province. Madrid has rebuffed these overtures, insisting that Catalan officials recognise the referendum as invalid and abandon their push for independence.

“The President of the Government has called for next Saturday in extraordinary session to the Council of Ministers. In that Council of Ministers, the measures that it will raise to the Senate in order to protect the general interest of the Spaniards, among them the citizens of Catalonia, all the citizens of Catalonia, and to restore the constitutional order in the Autonomous Community will be approved,” Madrid adds in its noon response.

In the absence of a climbdown from one side or the other, a special cabinet meeting will be held in Madrid Saturday to push ahead with the invocation of Article 155.

The Euro rallied sharply against the Dollar in response to Madrid’s decision to push ahead with Article 155, although it remained in the red when stood next to other safe havens such as the Yen and Swiss Franc.

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“I think there could be a negative surprise, but as long as it doesn’t threaten the integrity of Spain or contagion to other volatile regions of Europe, it shouldn’t change the medium-term trajectory of the currency,” says Marshall Gittler, chief strategist at ACLS Global. “If we were to see people marching in Belgium or Northern Italy with Catalonian flags shouting “us next”, that would be a different story."

Catalonia is a wealthy province of Spain that plays host to some 7.5 million inhabitants as well as the cultural and economic powerhouse that is Barcelona. It accounts for around 20% of Spanish GDP.

Fears of a fresh bout of Eurozone breakup risk ripened, temporarily, before and after the Catalonia vote in early October. However, the broader risk of a European, or even Spanish rupture, is judged as low in the eyes of the market.