The market potential of Catalexit

Catalonia is at the brink of the independence. The kind of freedom unknown until now. If you think that Brexit is a precedent for forex market behavior in case Catalonia really steps in and declares political or economic independence from Spain, then forget it.

Reasons are simple. While Brexit meant separation of the UK from the whole of European Union, a possible Catalexit, although similar in essence, structurally is very different.

With about 2% of GDP of the Eurozone, the economic consequences of Catalexit are much more relevant for Spain itself than for the whole of the Eurozone, the political aspects of such a move are far beyond the current market risk evaluation.

The market potential of Catalexit is given by the proportions of Catalonia in terms of the European Union and the Eurozone. Compared to the UK and its share of GDP to the EU, Catalonia is representing a much smaller portion of the economic activity, but political message is a key fear factor.

Market reaction

Given all other aspects being equal, Catalexit represents economically a 20% risk factor compared to Brexit. Should the forex market be caught by surprise by Catalexit, the euro/dollar market should take a hit about 4% downwards. Such a scenario would mean that, from the current level of about $1.1750, the euro should fall towards $1.1300 at least. A potential move of 400 pips that gives a reason good enough to think about it in advance, before Catalan Parliament starts its session at 6 pm Barcelona time (16:00 GMT) on Tuesday, October 11, 2017.

Should the Catalexit scenario realize, the forex market is likely to discount euro across the board with the US Dollar, Japanese yen, Swiss franc and even British pound being the main beneficiaries with market reaction possibly overshooting the core economic impact and with Catalonia leaving Spain taking whole European integrity into question.

EURUSD Daily chart

Catalonia in numbers

With 7.45 million people, the region accounts for 16% of Spain’s population, only 2.2% of the population in Eurozone. With an economy sized at 215.6 billion euros, Catalonia is larger than of most countries in the Eurozone. While it represents about the 20% of the Spanish economy, in terms of the Eurozone it represents slightly more than about 2% of its GDP. With exports and inward investment representing about one-quarter of the Spanish indicators, losing Catalonia will belittle the whole economic power of Spain more significantly than the one of the Eurozone.

While the UK economy represented roughly 10.8% of the GDP of the EU, the Spanish economy represents about 10.3% of the Eurozone economy. Losing Catalonia from Spain is much like Wales, Scotland and Northern Ireland separating from the UK, rather the separation of the whole UK from the EU.

Support for the independence