Divorce Italian Style? – Euro Feels the Heat

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Market Drivers November 14, 2016
Renzi referendum pressures euro
USDJPY to 108
Nikkei 1.71% Dax 0.87%
Oil $43/bbl
Gold $1226/oz.

Europe and Asia:
EUR IP -0.8% vs. -1.0%

North America:
No Data

The euro dropped more than one big figure at the start of week’s trade reaching a low of 1.0728 in early European dealing on market fears that Italy may be entering a period of high political tension that could threaten its membership status in EU.

The euro was sold mercilessly throughout the night with the pair hitting lows not seen since January of this year, as the political climate in Italy appears to have deteriorated. At the start of December Italy is to vote on a referendum that would alter its constitution and allow more decision making to be made at the federal level. The intent of the referendum is to allow the government to streamline decision making and enact much needed reform in the country’s chaotic system.

However, support for the referendum has plunged in past few weeks with the NO vote now leading and the whole issue is now being seen as a proxy vote for Italy commitment to remaining in the EU. Prime Minister Renzi has promised to resign if the referendum fails and his anti-EU opponents in the Northern League and the Five Star party have seized on the issue as a way to reject Mr. Renzi’s pro-EU stance.

Donald Trump’s win last week has emboldened the anti-EU factions in Italian politics and it appears that the very same political impulses that gave birth to Brexit and Mr. Trump’s victory are now dominating popular will in Italy as well. Italy is the third largest economy in the EU and the risk of its possible exit from the union is starting to send jitters through the market. The EUR/USD has now lost 6 big figures in less than a week breaking all of the long term technical support points. With sentiment now turning decidedly negative the pair looks to test the 1.0700 figure before the end of day.

There is no data on the US docket, but the greenback remains well bid as US rates are now within a whisker of the 2.25% level on the benchmark 10 year bond. The spike in yields has boosted USDJPY which came within a few pips of breaking the 108.00 barrier and looks to take out that level as the day proceeds.

Boris Schlossberg
Managing Director

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