Italian Referendum could cause considerable currency volatility
Holding a referendum is looking like a poor political manoeuvre for Prime Ministers. David Cameron was hoisted by his own petard over the Brexit vote and Italian PM Matteo Renzi is in the same boat after a resounding loss in his referendum on vesting increased power with the Government.
This anti-establishment and, some consider, Anti-EU vote has really splashed the gravy on the EU train. With a 66.4% turnout, there is no doubting the mistrust of the establishment by the voters in Italy.
"The immediate impact will be nervousness amongst investors who were perhaps seeking to invest in Italy," says David Johnson, Director at Halo Financial (www.halofinancial.com). "That could well sound the death knell for Monti dei Paschi di Sienna, the troubled Italian bank that needs a fresh €5 billion investment just to survive. There are rumours that other Italian banks have similar – if perhaps not such severe – problems. Moreover, the relationship between Italy and the EU will be strained if the Five Star political movement in Italy gains further influence."
"The Sterling – Euro exchange rate spiked to €1.2040 after the votes were counted but settled back on profit taking and the Euro – USD exchange rate dipped to the very evident $1.05 support before bouncing a little. Uncertainty still hovers around the Euro like a group of Harry Potter’s dementors," says Johnson.
There will be a scrabble to try to calm nerves in Italy and the EU will undoubtedly play down this challenge. Whether this will be the start of ‘Italeave’ or ‘Ital-exit’ remains to be seen but the mere threat that EU exit could be an outcome is enough to keep the Euro on the back foot for now.
"Those with Euro currency exposure can mitigate some of the risk with a combination of forward contracts, automated orders or maybe – if it is required – they could investigate the use of Options to protect against potentially negative rate changes," explains Johnson. "There is no doubt, though, that risk management is required in these unprecedented times."