Dollar Retains Firm Tone, Spanish Markets Stabilize

Firm US interest rates and a strong manufacturing ISM yesterday help
support the greenback, while
disappointing construction PMI in the UK weighs
on sterling. 
The euro briefly slipped below $1.17 in Asia for the
first time in six weeks.  It has recovered toward the highs seen in North
America yesterday (~$1.1760).  

There are several euro option strikes that
be in play today. 
In the euro, between $1.1750 and
$1.1775, there are nearly 2.9 bln euros in options that expire today.  And
there are another nearly 900 mln euros
struck at $1.18.  

Back-to-back weekend political developments in Europe have helped take
the shine off the euro, alongside the greater confidence of a December Fed hike

The CDU won in Germany, as widely anticipated, but rather than a new Grand
Coalition with the SPD, and now coalition with the FDP and Greens appears
necessary.  It may take the rest of the year to put into place.  At
the same time, the cost of the FDP participation, as well as the exposed
right-flank of the CSU in Bavaria, could make for a Germany less inclined to
push ahead with new post-Brexit, post-financial crisis integration, which
Macron as proposed.   

This past weekend, Spain’s Catalonia region went ahead with a
secessionist referendum that was ruled illegal by the Supreme Court.
The low-level efforts of Madrid to hamper
the referendum, and enforce the law, such as confiscating ballots, escalated to
outright physical force to disrupt. The risk is now either a government crisis,
where Rajoy, who leads a minority government, is forced to retreat or resign or a constitutional crisis.  

Reports suggest Rajoy is considering invoking a 1978 constitutional
article that lets Madrid revoke Catalonia’s regional status. 
coalition partner, the newly-formed center-right Ciudadanos, supports such
action, while the opposition Socialists favor talks with the secessionists, but
not taking the more provocative step.  Meanwhile,
the Catalonia still seems to be pushing ahead with their independence. 
Things may come to a head on October 6, which is the anniversary of the
execution by Franco of a leader of the Catalonia’s independence movement.

Investors remain fairly calm  Spanish assets did underperform yesterday but are holding their today. 
The 10-year yield is up 1.2 bp today, but that is less than Italy and the core
markets, including German Bunds.   Over the past week, Spain’s premium
over Germany has widened a single basis point.  It is at the shorter-end
of the curve that the pressure is evident.  The 2-year yield is up nearly
four basis points today, while Italy’s yield is slightly lower and the core
yields are up less than two basis points.  In the equity market, Spanish
shares are slightly lower, off 0.15%.  Over the past five sessions, it is
up 0.5%.  

The UK’s manufacturing PMI disappointed yesterday (55.9 vs. 56.9 in
  Today it was the construction PMI.  The 48.1 reading
(from 51.1) is the lowest since last July and below the 50 boom/bust
level.  Sterling was sold on the
news.  It is lower for the third session and seven of the past
eight.  It broke through the 38.2% retracement of the advance since the
late August low near $1.2775 yesterday (~$1.3320) and approached the 50%
retracement (~$!.3215) today.  The five-day moving average is breaking
below the 20-day average for the first time in a little more than a

The service PMI that will be released tomorrow covers the largest part of
the economy.
  Another disappointing report could see sterling move
toward the 6.18% retracement, which is found
near $1.3110.  Meanwhile, the Tory Party Conference continues, and so far there haven’t been any
fireworks.  However, Johnson appears to be trying to separate himself from
May, but each time he is called out, he
returns to the fold, until the next
time.  Still, at this juncture, if Johnson resigns or is dismissed, sterling would likely to react
positively.  To be sure, this is not a prediction of Johnson’s departure,
but rather simply the conclusion of thinking through the scenario. 

The Reserve Bank of Australia’s meeting came and went without much
  There was little change in the assessment or guidance. 
The central bank is on hold.   The Aussie made a marginal new low (~$0.7785–low
since mid-July) but rebounded back
through $0.7800.  Resistance is seen
in the $0.7830 area.  

Ahead of the ADP report on Wednesday, and the storm-marred national jobs
report before the weekend, the US reports September auto sales.
strong recovery is expected after a three-year low of 16.03 mln (SAAR) was reported
for August.  We caution that the storms’ impact will distort a broad range
of data.  We suspect that, in part, this explains the over-the-top
strength seen in the manufacturing ISM (and not picked up by the Markit PMI),
and it could help bolster the auto sales report.  On the other hand, it is
expected to depress the non-farm payroll report, with the Bloomberg estimate
nearly half the year’s average.  There are no Fed official speeches today,
but several speak tomorrow, including Yellen and Powell, the later has moved up
in the betting markets a candidate for the Chair. 


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