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Euro climbs from 20-month low as Italy ‘no’ vote reaction fades

Tuesday, 6 December 2016

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ROME: The euro rebounded from its lowest level since March 2015 and a decline in Italy’s bonds was limited as the reaction to Prime Minister Matteo Renzi’s loss in the nation’s constitutional referendum proved relatively short-lived.

While the single currency initially dropped on news that Renzi would resign after conceding defeat, it recovered to strengthen against most of its 16 major counterparts, reaching a two-week high versus the dollar. Renzi’s plans to rein in the power of the senate was defeated by 59.1% to 40.9%, according to the final tally.

Although Italy’s 10-year bond yield climbed the most in three weeks, the move was not enough to erase last Friday’s declines.

With a “no” vote largely expected, the market reaction was relatively muted compared with gyrations after Britain’s decision in June to leave the European Union and Donald Trump’s victory in last month’s US presidential election. The pound fell by more than 10% as it became clear the UK had voted for Brexit, while the dollar swung wildly in the hours following Trump’s win.

The euro rose 0.5% to US$1.0717, after falling earlier 1.5% to US$1.0506, the lowest since March 16, 2015. Italy’s 10-year yield climbed 13 basis points to 2.03%, having dropped 15 basis points on Dec 2. 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.

The extra yield demanded by investors for owning the nation’s 10-year bonds instead of German bunds surged on Nov 28 to 192 basis points, the most since June 2015. The spread was 169 basis points MondayBefore the vote, some investors saw the currency as the best way to play the referendum since the European Central Bank’s asset-purchase program provides a source of support for fixed-income securities.

The nation’s benchmark FTSE MIB Index of shares fluctuated yesterday after gaining 3.5% last week. While Renzi’s concession initially roiled other currencies, the fallout was limited. The yen erased a gained of as much as 0.6% against the dollar.

Source by: Internet

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