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Brexit, Trump… now Italy: Euro drops to 20-month low

Rome - The euro fell to the weakest level since March 2015 as Italian Prime Minister Matteo Renzi said he would resign after conceding defeat in the nation’s constitutional referendum.

The single currency dropped against all its 16 major counterparts as the referendum on Renzi’s plans to rein in the power of the Senate was defeated by 60% to 40%, with almost all the vote counted. The euro pared losses following the premier’s speech, while the yen erased an earlier advance against the dollar.

“Markets tend to react much faster to changes of environment now,” said Yannick Naud, head of fixed income at Banque Audi (Suisse) SA in Geneva. “There is now a possibility of the euro reaching parity to the dollar. Maybe not right away, but it is a possibility if there is certainty regarding new elections.”

The euro dropped 1.1% to $1.0548 as of 13:36 in Tokyo after falling as much as 1.5% to $1.0506, the lowest since March 16, 2015.

The result is the latest in a series of votes that have roiled financial markets in 2016, following Britain’s vote to leave the European Union in June and Donald Trump’s victory in last month’s US presidential election. Still, with a “no” vote largely expected, the initial currency-market reaction is relatively muted compared to those events - 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.

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.

“If the referendum is rejected, this is not the end of the world,” Fabio Fois, a London-based economist at Barclays, said before the vote. “Bicameralism will remain, but what really matters is the government attitude to press ahead with reforms.”

A rejection of Renzi’s reform means Italy’s government bonds, which have been the euro zone’s worst performers in the past six months, may drop Monday. The bond market opens at 08:00 Rome time.

The yield extra yield demanded by investors for owning the nation’s 10-year bonds instead of German bunds surged on November 28 to the most since June 2015. It pared that increase last week, while Italian stocks gained.

Before the vote, some investors said they saw the currency, rather than the nation’s bonds, as the best way to play the referendum, as the European Central Bank’s bond buying plan provides a source of support for the fixed-income securities.

The nation’s benchmark FTSE MIB Index of shares, which starts trading at 09:00 in Rome, has dropped about 20% this year 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, while the Australian dollar and Mexican peso pared losses Us Treasuries gained for a second day, with the benchmark 10-year yield falling four basis points to 2.35%.

WATCH: See how euro drops after resignation

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