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Euro slides as projections show Italy voted 'No' in referendum

Monday, December 5, 2016 - 07:43

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The euro fell as initial projections showed a lead for the "no" campaign in Italy's constitutional referendum.

[ROME] The euro fell as initial projections showed a lead for the "no" campaign in Italy's constitutional referendum.

The single currency slid against all of its 16 major peers as investors gauged whether the vote could upset the nation's political stability, given Prime Minister Matteo Renzi had signalled he would step down on a loss. Were the result to trigger early elections or a cabinet reshuffle, any future government would still have to deal with the country's beleaguered banks and fragile economy.

Higher-yielding currencies such as the Aussie and and kiwi dollars also retreated. Mr Renzi delayed by 20 minutes an appearance earlier planned for midnight in Rome, according to RAI television.

"A 'no' vote throws Renzi's career and Italian political stability into doubt," said Stephen Gallo, a currency strategist at BMO Capital Markets in London. "The euro could drop to US$1.0475 or US$.10500 against the US dollar if the 'no' is confirmed, and then bounce back."

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The euro slid 1.2 per cent to US$1.0542 as of 12:03am Rome time. It touched US$1.0518 on Nov 24, the lowest since March 2015. The British pound and the New Zealand dollar each slid more than 0.6 per cent, while the Australian dollar and Mexico's peso each weakened 0.4 per cent.

A "no" vote would be the latest in a series of political events that have roiled financial markets in 2016, following Britain's vote to leave the European Union in June and Donald Trump's victory in last month's US presidential election. Still, with a "no" vote largely expected, the initial currency-market reaction is more muted - the pound fell by more than 10 per cent as it became clear that the UK had voted for Brexit, while the US dollar fluctuated wildly in the hours following Mr Trump's win.

A rejection of Mr Renzi's reform means Italy's government bonds, which have been the euro zone's worst performers in the past six months, may open lower Monday. The nation's benchmark FTSE MIB Index of shares, which has dropped about 20 per cent this year may extend its decline.

"Expect volatility premiums to rise and the euro to trade below US$1.05 against the US dollar, potentially testing last year's low of US$1.0460 in a 'no' vote scenario," Petr Krpata, ING Groep NV's London-based chief foreign-exchange strategist for Europe, Middle East and Africa, said before the referendum. "While the market is positioning for the risk of 'no' vote outcome, a knee-jerk reaction is still likely to be a lower euro" as it would "underline the upcoming risk" of other elections in Europe.

While the referendum has raised concerns over Italy's future in the euro-region, the nation's political and legal system mean a "no" vote is unlikely to trigger a quick exit.

"If the referendum is rejected, this is not the end of the world," Fabio Fois, a London-based economist at Barclays Plc, said before the vote. "Bicameralism will remain, but what really matters is the government attitude to press ahead with reforms."

The euro weakened 3.6 per cent against the US dollar in November, its biggest monthly decline in a year, weighed down by political uncertainty in the region and the prospect of the European Central Bank extending its stimulus measures this week.

Moves were exacerbated as the US dollar strengthened on increasing bets the Federal Reserve will raise interest rates this month after Donald Trump's win in the presidential election spurred speculation of expanded fiscal spending.

In fixed-income markets, the yield premium demanded by investors for owning the nation's 10-year bonds instead of benchmark German bunds surged on Nov 28 to the most since June 2015, before rebounding last week as Italian stocks also gained.

Still, holders of Italian government debt lost 2.1 per cent in the past six months, according to the Bloomberg Italy Sovereign Bond Index.

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