USD suffers hangover after holiday

After experiencing a solid recovery in the second half of September the US dollar reversed gains, partially at least, and started the week on the back foot. The dollar index traded as low as 93.43 before inching up to 93.54 in late Asian session. The dollar lost ground against most of its peers, falling the most against the AUD (-0.35%), the SEK (-0.32%) and EUR (-0.26%). EM currencies were also better bid as the risk sentiment improved. The South Africa rand, Mexican pesos and Turkish lira reversed losses and surged 0.55%, 0.30% and 0.45% respectively.

Investors are struggling to have a clear vision on the USD outlook as the final mix of political and monetary policies could have various effects. On the monetary policy side, Janet Yellen’s re-election is far from being a done deal, which has unleashed speculation about her potential successor, should she passes the cut. Donald Trump will give his final decision within the next couple of weeks. The range of candidates, in term of monetary policy stance, is quite wide with Kevin Warsh, Gary Cohn, Jerome Powell and Janet Yellen being in the President’s shortlist.

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On the political side, following the important steps recently undertaken by the Congress toward advancing the tax reform, there is no real fresh news so far. Although there are some tensions within the Republican Party about the proposed tax cut, mostly between Trump and Corker, which could delay somewhat the implementation of the new tax plan.

All in all, uncertainties are mostly stemming from temporary factor. Therefore, we believe that this week dollar weakness will prove temporary as investors focus will see the glass half-full again.

Risk not out of Catalonia

We suspect the markets is underestimating the risk involved with the Catalonia independence movements. EURUSD 1 month implied volatility continue to decline despite potential event risk. Markets generally price the most obviously path of events. Hence why markets always get caught flat-footed by extreme events. Depending on what media you chose to watch will significantly influence your view of the situation. Over the weekend, demonstrations in Barcelona against independence helped lessen uncertainty. While threats of migration of large corporations out of Barcelona convince capitalist thinkers that logic and ‘common’ sense would find a markets friendly resolution.

Pundits suggested momentum had sifted to moderate independent groups. However, we should use Noble prizewinner Richard Thaler’s work in behavioral economies dealing with ‘irrationally’ to guide us. Or we can just remember how a similar corporate-line mislead most investors on Brexit. No, after Spain and Europe recent actions we suspect that Catalonia’s have harden their resolve for independence. The separates have been extremely quick since Monday that would hint as to coming strategy. Yet Madrid raise the stakes as Spain’s Deputy Prime Minister, Soraya Saenz de Santamaria, announced in a press release that the Spanish government s would trigger article 155 if Puigdemont declares independence. A move widely expect but one drew a clear line in the sand. Pushed in a corner, in our view the separatist only next move will be the declarations of independence most likely today. Madrid would trigger Art 155 of the constitution which dissolved key Catalonia powers and allow the central government to take control. The article has never been activated and guide lines are gray.

Yet the move will be seen as a clear escalation. What come next in our view is extremely unclear. Yet we are not ready to concede an orderly solution that requires constitutional changes and reliance of ratification by two-thirds of the Spanish parliament. The act of declaring independence would indicated that the movement no longer considers Spain legitimate and unlikely to continue through traditional constitutional process. In the near term we remain short EUR and see current EURUSD rally to 1.1780 as an opportunity to reload short position.

Silver: Institutional investors are bullish

Silver has strongly bounced back since the start of October and is back above 17$. The precious metal has been very volatile lately.

The price of precious metals such as Gold and Silver have been weighed down by the number of ‘paper’ contracts banks have used and abused over the last decade. According to the most recent 13F filling from the SEC (Securities & Exchange Commission), JPMorgan, Commerzbank or the Swiss National bank have increased their stake in Silver Wheaton.

We believe that this reveals the changing underlying fundamentals, in particular the fact that this may look like a reflation trade that would drive precious metals price higher. On top of that the strong exposure of financial institutions to Silver paper contract makes the increasing stake in Silver Wheaton very logic. It hedges big institutions exposure to Silver.

On a pure technical standpoint the precious metal is trading above its 100-Day moving average and we believe there are definitely more upside potential for the commodity.

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