Spanish Separatism, Canadian Govt Goes Loonie

The euro and Canadian dollar will be in focus to start the week after Spanish election results and a surprise anti-investment decision from the Canadian government. Last week, in a sign of the indecision in markets, the Australian dollar was the best performer while its commodity cousin CAD lagged.

Early exit polls in the Spanish regional elections suggest Basque nationalist parties have won, which will increase momentum toward separatism. The government received some good news in Rajoy home region of Galicia where it won an absolute majority.

An unwillingness to anger voters ahead of the elections was a factor that restrained the government from applying for ESM aid. So long as separatist momentum is restrained, the euro should benefit from a fresh mandate.

The Canadian dollar is likely to start the week on the defensive after a surprise government move to block Malaysias state-owned energy producer in a $6 billion takeover of a Canadian natural gas producer saying it didnt provide a net benefit to Canada.

The completely unexpected move comes as the government reviews a separate $15 billion takeover by a Chinese state-controlled company. Signs that the country is closed for foreign investment will take untold billions off the table and undermine CAD.

At the same time, the Bank of Canada meets on Tuesday and it is looking increasingly likely they will remove the hawkish tilt from the statement. On Friday, soft inflation added to the argument as CPI fell to 1.2% y/y compared to 1.3% expected.

The stock market sent traders into the weekend on a jittery note. The S&P 500 fell 1.7% in the largest decline since June. Considering the decline, FX was relatively stable but if further losses materialize that is unlikely to continue.

The EU Summit wrapped up without any measures to boost confidence in periphery debt markets although there was talk of governments sharing losses on legacy assets with the ESM and other countries in the union.

In the Middle East, tensions continue to rise after the car bombing in Beirut. Separately, joint US-Israel military drills are raising fears of a strike against Iran.

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-AB