Spain, the Euro, and the Dollar
First there was Brexit, and now Catalonia.
Spain is the fifth largest economy in the Euro zone, and Catalonia is its most prosperous region, contributing around 20% of the country’s Gross Domestic Product (GDP), so events there are well worth keeping an eye on.
Spain was hit hard during the financial crisis, as its economy contracted dramatically and unemployment reached 26%. More recently, it has started growing again with GDP climbing around 3% over the summer, but unrest in the Catalonia region has persisted.1 Meanwhile, Brexit talks aren’t going that swimmingly, either, and there is increasing concern that they may stall or fall apart. Taking note of this, Scotland is once again considering reviving its own independence referendum.
As we have seen with other political events of late, all this may come to naught, and the markets may ignore goings on in these areas. Then again, at some point, these policy-related distractions may have a dramatic impact.
If nothing else, the potential break-up of Spain and the failure of England and the EU to negotiate a reasonable separation agreement have implications for the relative competitiveness of global economies and, by extension, currencies. Following the Catalonia vote in early October, the euro fell, relative to the dollar, highlighting its vulnerability to these kinds of internecine disputes. Markets are no fans of uncertainty, and the on-again, off-again secessionist plans of various Euro countries and regions are distracting attention from what has generally been an improving economic picture.
As we have said before, over the long haul, currencies tend to reflect the strength or weakness of a country’s, or region’s, underlying economy. Over shorter periods, relative valuations can be driven by multiple factors, including interest rates and politics. Of these factors, politics can be the most unpredictable, with unexpected election results often driving significant market volatility. For investors who hope to avoid having their portfolios overly influenced by political wrangling, currency hedging may provide managed risk.
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1. Bosch, Sofia, CNBC, “Here’s how bad economically a Spain-Catalonia split can really be”, October 2, 2017.
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