Italy jitters are short-lived but lira still lags

Yen picks up in early deals, euro falls in Asia

LONDON, Dec 5, (Agencies): Emerging markets shrugged off political uncertainty in Italy, Europe’s third-largest economy, on Monday, though the prospect of rising US interest rates and a tumble in Chinese shares kept the mood subdued.

There was an initial flop from the trouble-sensitive Turkish lira and currencies such as the Polish zloty and Czech crown that have the closest trade ties to the euro zone.

The stumble proved short-lived, however, with currency losses trimmed right back and stocks in Poland and South Africa rising solidly after both countries got credit rating boosts from S&P Global on Friday.

There was particular relief that South Africa had dodged a downgrade to junkstatus, while the outlook on Poland’s rating was returned to stable after a shock downgrade at the start of the year.

UBP’s EM macro and FX strategist Koon Chow said European reaction to the Italian referendum was fairly restrained.

“EM currencies are a little bit weaker, but anything less than 1 percent is meaningless, and even the central and eastern Europe currencies are only down a bit against dollar — and for them it should be a double whammy because of the euro.” More of the drama had been in Asia. Currencies had seen the first reaction to the Italian referendum result while China’s blue-chip share index saw its biggest fall in six months as nerves about a trade war with the United States were compounded by the top securities regulator warning of “barbaric” share acquisitions.

The CSI300 index fell 1.7 percent to 3,469.41 points as the Shanghai Composite Index lost 1.2 percent too.

“You launch leveraged buy-outs using illegitimate money, turning from a stranger to a barbarian at the gate, and ultimately becoming a robber in the industry,” said Liu Shiyu, chairman of the China Securities Regulatory Commission (CSRC). “That is unacceptable.”

He was referring to a recent series of acquisitions that he described as “somewhat abnormal”.

A row was also simmering over US Presidentelect Donald Trump choosing to calling Taiwan’s President Tsai Ing-wen on Friday.

In Beijing, which regards Taiwan as a renegade province, foreign ministry spokesman Lu Kang said: “The whole world knows about the Chinese government’s position on the Taiwan issue. I think President-elect Trump and his team are also clear.”

Negative

Most emerging Asian currencies had been pulled back by the initial negative reaction to the overnight result in Italy’s vote, which raises fresh uncertainty for troubled Italian banks, as well as the prospect of an early election.

Malaysia’s ringgit edged up, however, after the central bank on Friday announced fresh measures to stabilise the hard-hit currency.

But the Turkish lira remained weak as inflation data came in weaker-than-expected due to a fall in food prices.

The lira, which was at almost 3.54 to the dollar by 1035 GMT, has lost nearly one-fifth of its value against the dollar this year, and analysts are expecting the central bank to react with further rate hikes.

In Asia, the euro briefly fell to a 20-month low against the dollar Monday after Italian Prime Minister Matteo Renzi announced his resignation following a crushing defeat in a referendum on constitutional reform.

The 19-nation currency slumped to $1.0506 at around 8:20 am (2320 GMT) in Tokyo trading, the lowest since March 2015 and down from $1.0664 late Friday. The unit later rebounded to $1.0585. Meanwhile, the yen, which is often bought as a safe haven in times of uncertainty, picked up in early deals with the dollar fetching 112.88 yen, against 113.51 yen in New York on Friday.

But the dollar quickly recovered to sit at 113.71 yen.

Italians voted against proposed reforms that would have curtailed the size and powers of the Senate and transferred powers from regions to the national government.

Opposition parties had denounced the proposed amendments to the constitution as dangerous for democracy because they would have removed important checks and balances on executive power.

Interior Ministry projections suggested the No camp, led by the populist Five Star Movement, had been backed by 59.5 percent of those who voted.

The defeat and Renzi’s departure threatens to plunge Italy into a new phase of political uncertainty and possible economic turmoil.

Some analysts fear a deeper crisis of investor confidence that could derail a rescue scheme for Italy’s most indebted banks, triggering a wider financial crisis across the eurozone.

Concerns

“His defeat in the face of populist moves will spawn concerns over the rest of Europe,” said Yunosuke Ikeda, chief currency strategist at Nomura Securities in Tokyo.

“But given the fact that this had been predicted beforehand, it’s not a surprise in the same way as the Brexit vote or (Donald) Trump’s election victory.

“As Prime Minister Renzi has now resigned, some investors might think all the bad news is out now.”

The impact on the euro may also have been mitigated by a vote in Austria where anti-immigration and eurosceptic Norbert Hofer’s bid to become the European Union’s first far-right president was resoundingly rejected.

In Italy, President Sergio Mattarella will be charged with brokering the appointment of a new government to run the country until the next general election, which is due to take place by the spring of 2018. Market players were now looking ahead to a European Central Bank meeting later this week and whether President Mario Draghi comments on the Italian referendum.

“The ECB is holding a governing council meet-

ing on Thursday. If president (Mario) Draghi makes dovish remarks in consideration of instability risks (from the vote), the euro would fall,” Nomura’s Ikeda said.

The euro dropped 1.3 percent to $1.0505, falling below its 1 1/2-year low of $1.0518 touched late last month, and testing its key support levels where the currency has managed to rebound in

the past couple of years.

A break below its 2015 March low of $1.0457 would send the currency to its lowest level since early 2003, opening a way for a test of $1, or parity against the dollar, a scenario which many market players now see as a real possibility.

Renzi’s departure looks set to boost political uncertainty in the euro zone’s third largest economy,

as his Democratic Party (PD) is running neck-and-neck with the anti-euro 5-star Movement in the opinion polls.

It also came at a bad time for Italy’s fragile banking system, as Monte dei Paschi di Siena, the country’s third biggest but ailing lender, needs to raise 5 billion euros by year end to avert the risk of being wound up.