It was clear that against a backdrop of global crisis, Italy would defy its government and not allow it the chance to apply European austerity policies. Matteo Renzi has made a wise decision by announcing his dismissal as he does not represent what Italians want.
Some are calling the result of the referendum as the third surprise of the year after Brexit and Trump’s election. There is a definite pattern here. It is certainly not the case that Italians do not want any change but what is sure is that they fear the possibility of becoming the new Greece.
It is now going to be very interesting to assess any consequences of this result. Italian banks are already suffering as markets begin to price in the lower likelihood of a bailout. From our point of view, the bailout will happen regardless as the Eurozone simply cannot allow the Italian banking sector to collapse, especially as this would have consequences for other European institutions.
The single currency is at such a weak point that with every new referendum, rumours of tension and collapse resurface. This is a trend that will weigh heavily on the Eurozone throughout 2017.
However, the tensions felt by the single currency are ironically helping the European Central Bank in the currency war against the US dollar. At the last ECB meeting, Mario Draghi announced the extension the QE programme until December 2017 and the pace of the asset purchase is going to be lowered to 60 billion euros each month.
Over the last few months, the ECB was on a wait-and-see mode. The bonds scarcity issue has not been really addressed. Indeed, there are currently two main rules regarding the types of bonds that the European Central Bank may buy under its QE programme. The rates must not be below the depo-floor of -0.4% and the institution cannot own more than 33% of a country’s debt.
The ECB is doing whatever it takes to paint everything in a dovish light. This is why the ECB extended the QE duration while lowering the pace of the purchase.
Currency-wise, we believe that the upside risk on the single currency remains somewhat limited and we may see a further test of the area between 1.08 and 1.09. Nonetheless, markets look optimistic regarding the US outlook for the end of this year and the EURUSD pair is clearly oriented downwards.