The single currency could sink to US80c, according to analysts, as a vital rebooting of Italy’s fragile banking sector is set be delayed again

This article is more than 3 years old

This article is more than 3 years old

The euro has fallen to a 20-month low against the dollar and investors fled riskier assets after Italian prime minister Matteo Renzi said he would resign on Monday following a crushing defeat on constitutional reform.

Renzi’s defeat threatens to undermine efforts to stabilise the country’s shaky banking system and deals a wider body blow to the European Union, which is already reeling under anti-establishment anger in the wake of June’s Brexit vote.

Italy referendum: Matteo Renzi to resign after defeat as Austria rejects far right – live Read more

The single currency, which opened at around $1.0685, slumped as much as 1.4% to $1.0505, its lowest since March 2015, before recovering a bit to $1.0539.

The drop to its session low was the sharpest since June and could pave the way for further falls when European trading gets under way later on Monday.

Analysts at RBC Capital Markets in Sydney argued that, based on what happened in 2012 at the height of the Greek crisis, the risk of a eurozone crisis could see the euro trade as low as $0.8000.

“It may sound extreme, but if a second euro zone crisis were to hit, with the US dollar at a much stronger starting point, the euro could arguably trade lower still,” they wrote.

Europe Elects (@EuropeElects) EU28: Euro reacts to exit polls in Italy's constitutional referendum. #referendumcostituzionale #ExitPolls #maratonamentana #Euro pic.twitter.com/TV3mGJVIdM

“It’s not very hard to see a new election, and it’s not very hard to see the [opposition] 5-Star Movement taking power and they’ve basically said they want to get out of either the European Union or the euro or both,” said Mark Wills, head of State Street Global Advisors’ investment solutions group for the Asia Pacific.



Against the pound, the common currency slipped 0.76% with one euro buying 83p.



The euro slid as much as 2.1% to 118.71 yen, but pared some of the losses to trade down 1.2% at 119.73 yen.

Some observers focused on the more immediate impact of the result on efforts to contain the growing crisis in the country’s banking system, especially the debt-ridden Monte dei Paschi bank, amid an expected spike in Italian borrowing costs.

“The ‘no’ vote was priced in to a certain extent in advance. So I do not expect a freefall in the euro in the near term,” said Minori Uchida, chief currency analyst at the Bank of Tokyo-Mitsubishi in Tokyo.

AntonKreil (@AntonKreil) Im going to keep ReTweeting this post I made on July 5th after #Brexit until people get it. The EU is in a much worse position than UK #EURO https://t.co/xTU7eoRzTC

“In the long run, this will delay progress in Italy’s efforts to get rid of banks’ bad debt and is likely to widen the yield spread of German and Italian bonds,” he added, a development which would make it much more expensive for Italian banks to raise much-needed capital.

European shares are likely to be sold off along with Italian bonds when trading opens in Europe on Monday. Futures trading indicated that the FTSE100 would fall around 0.6% and the Dow Jones average would dip about 0.2% on the open in New York.

Stock markets in Asia dipped following news of the referendum result. Japan’s Nikkei slid 0.7% and the Sydney markey slumped 0.65%. Korea was down 0.21% and the Hang Seng was off 0.36%.

Referendum result may lead nowhere for Italy's Five Star and Northern League Read more

Renzi’s resignation represents a fresh blow to the European Union, which is struggling to overcome a raft of crises, and was eager for Renzi to continue his reform push in the euro zone’s heavily indebted third-largest economy.

Analysts at RBC Capital Markets in Sydney argued that, based on what happened in 2012 at the height of the Greek crisis, the risk of a eurozone crisis could see the euro trade as low as $0.8000.

“It may sound extreme, but if a second euro zone crisis were to hit, with the US dollar at a much stronger starting point, the euro could arguably trade lower still,” they wrote.

Markets had earlier taken some encouragement when Austria’s far-right presidential candidate was soundly defeated by a pro-European contender, confounding forecasts of a tight election.

Holger Zschaepitz (@Schuldensuehner) Nigel Farage: Hope the exit polls in #Italy are right. This vote looks to me to be more about the #Euro than constitutional change. pic.twitter.com/WBIUVsC5Hj

The European Central Bank meets on Thursday amid much speculation it will announce a six-month extension of its asset buying program and widen the type of bonds it can purchase.

“There has been some speculation that the ECB would step and front load purchases of Italian bonds if markets became unsettled by a No result, so perhaps it is the thoughts of a central bank liquidity sugar pill driving things again,” said ANZ economist Jo Masters.