Euro narrows loses but traders still expect it to near parity with the dollar

Italian prime minister’s resignation has little effect on currency

PUBLISHED : Monday, 05 December, 2016, 9:12pm
UPDATED : Tuesday, 06 December, 2016, 2:38pm

The euro dropped 1.4 per cent to the lowest level in 20 months at 1.0503 in early trading, as Italian Prime Minister Matteo Renzi announced his resignation following a referendum to reform the constitution was defeated.

However,the currency had narrowed its losses to trade just 0.22 per cent lower at 1.0648 against US dollar by 4.35 pm in Hong Kong, before European markets opened.

“The euro is not continuing to expand its decline today and its reaction is relatively muted because the “no” vote was highly expected and the defeat is only the initial step,” said Delta Asia Securities’ chief operating officer Victor Au.

Compared with the near 10 per cent decline in the pound after Brexit, the euro’s fall was considered small, but analysts still expect other uncertainties to put further pressure on euro.

“It is likely that the country will exit from euro-region if 5-Star Movement takes power in the new election after Renzi’s resignation, which will trigger a further big decline of euro. It is highly possible that euro could trade as low as parity with the dollar early next year.”

Zhong Yue, a China-based market strategist at FXTM, said reaction to the rejection was muted so far, but other political risks on the horizon could force the markets to hold onto euro shorts next year. The market is now is expecting the euro to trade parity to the dollar, Zhong added.

The European Central Bank meets on Thursday, and Zhong said it is difficult to see a strong euro rebound in short term if the ECB keeps the its monthly asset purchases unchanged.

Reuters reported the ECB is expected to announce a six-month extension to its quantitative easing programme next week, according to a majority of economists polled by Reuters.