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EUR/USD Stable After Italy Votes 'No', PM Renzi to Resign

EUR/USD Stable After Italy Votes 'No', PM Renzi to Resign

2016-12-05 10:20:00
Nick Cawley, Strategist

Talking Points

- Euro recovers early losses after Italian ‘No’ vote.

- Italian bonds and bank shares under modest selling pressure.

- President Mattarella to appoint interim government.

Italian Prime Minister Matteo Renzi has said that he will tender his resignation today after losing the constitutional referendum by a slightly larger margin than anticipated. With nearly all of the results in, the ‘No’ vote garnered nearly 60% of the vote, with a high voter turnout of around nearly 69%. Italy’s President Sergio Mattarella will now look to appoint an interim government, although Renzi has already said that he will not take part in this government. The new leader would then look to appoint a new cabinet. If it proved to be impossible to form a new interim government, President Mattarella would call for a general election.

With Renzi now on the way out, the much-needed cash injection needed by the banking system may prove harder to raise. According to a recent report by the FT, up to eight Italian banks may need a capital injection, with Banca Monte dei Paschi di Siena (MPS) the most visible. MPS shares have nearly halved since late November and have slumped from EUR104 to a current level of EUR19.8 over the course of the year. Banca MPS shares currently trade flat on the day after opening losses of around 5%.

Italian bonds are also trading lower on the news but losses are likely to be contained by the knowledge that the European Central Bank will be buying bonds as part of its monthly EUR80 billion quantitative easing program. The central bank is also set to buy more bonds in early December, to avoid illiquid markets later in the month, while ECB President Mario Draghi is likely to announce at this week’s policy meeting a six-month extension of the bond-buying program which is set to end in March 2017.

Chart 1: EUR/USD Daily Chart (April 2016 to December 2016)

EUR/USD Stable After Italy Votes 'No', PM Renzi to Resign

The Euro reacted calmly to the news, with EUR/USD dropping to the 2015 low of 1.0506 before quickly bouncing back to trade around Friday’s close near 1.0650.

--- Written by Nick Cawley, Analyst

To contact Nick, email him at Nicholas.cawley@ig.com

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