Strategists at ING give their views on how to approach the Euro-Dollar exchange rate heading into the next political event risk of 2016 - Italy's constitutional referendum.
EUR/USD should continue devaluing to its previous 1.04 lows if the Italian referendum returns a majority for “No” as polls currently suggest.
The EUR/USD should extend its sell off down to 1.0460, the March 2015 lows if the Italian Referendum returns a “No” vote, says ING’s Paulo Pizzoli.
Polls are pointing firmly to a No vote and focus is shifting to what happens next, in particular whether Renzi will resign.
“Needless to say, EUR/USD should depreciate, potentially testing last year's low (1.0460),” says Pizzoli in a brief to clients ahead of the vote.
Whilst there is still a high proportion of undecided voters – over 20% according to some analysts – and these voters could swing the referendum either way, “No” voters still lead “Yes” voters by a substantial margin.
“On average, last week’s polls had “No” at 52.9% and “Yes” at 47.1%, with the percentage of undecided voters (absent in some opinion polls) at 20%,” said the ING analyst.
One element which favours the “Yes” vote is the high number of expatriates who have been targeted and are likely to side with the “Yes” campaign.
Despite attempt by “Yes” to divert attention to the issues which will be voted on the “No” camp have turned it into a referendum on Renzi’s government.
“Having failed to de-personalise the vote, Renzi has said that he would resign should the “No” vote prevail, being unwilling to continue his mandate if unable to change the country.
“It is likely that he meant to suggest a victory for “No” would mark a political discontinuity, and that status-quo continuation would increase instability,” concluded Pizzoli.
ActivTrade’s De Casa Expects Race to Be Closer than Expected
Despite the “No” votes lead in polls, ActivTrade’s chief analyst Carlo Alberto De Casa cautions against complacency given recent election’s ability to deliver surprises.
“The result of the referendum is not yet written. Given the extent of the surprises so far, the result may be far closer than expected,” says De Casa.
It is likely but not inevitable that Renzi will resign following a “No” win, especially if it is by a sizeable margin.
“If the NO campaign wins we could have the option of a new government still lead by Renzi though this is unlikely unless Renzi loses with a high percentage of 48-49%.”
The possibility of centre right uniting with centre right to ward off 5 Star may also result.
It is therefore not a given that Renzi’s resignation will automatically lead to a new election, and a win for 5 Star.
“It would not be so easy to create another government, but it is possible that the centre-left and centre-right will attempt this, in order to avoid a vote now (and the possibility of the populist 5 stars get a majority).”
Renzi’s decision to resign would hit Italian equities and expand the spread of Italian and German bond yields as the risk premium on Italian debt would rise suddenly and steeply, adds De Casa.