Euro Parity in Play for Traders as Italy Succumbs to Populism

(Bloomberg) -- Traders view the euro’s slump to a 20-month low against the dollar as potentially just the beginning of a slide to parity as the resignation of Italy’s prime minister threatens renewed turmoil for Europe.

The odds of the euro weakening to $1 in the next nine months are above 50 percent, from 45 percent on Friday and just 16 percent a month ago, options prices show. Nine of the 53 forecasters surveyed by Bloomberg predict the euro will be at $1 or less by the end of 2017, up from two at this time in November. Deutsche Bank AG predicts 95 cents, Goldman Sachs Group Inc. puts euro parity among its top trades for 2017, while Societe Generale SA and National Australia Bank Ltd. both say it may occur by April.

Euro Parity in Play for Traders as Italy Succumbs to Populism

Matteo Renzi

Photographer: Chris Ratcliffe/Bloomberg

Matteo Renzi is the latest political victim of a populist wave sweeping developed nations, following the U.K.’s decision to exit the European Union and the election of Donald Trump as U.S. president. Italy’s referendum on constitutional reform became a de facto vote of confidence in Renzi’s government, with the anti-euro Five Star Movement set to benefit from the result. France, Germany and the Netherlands are scheduled to hold elections in 2017.

‘Distinct Possibility’

“Parity is a distinct possibility between now and next year’s French elections, but that also has to be seen in the context of expected additional U.S. dollar strength,” said Ray Attrill, global co-head of foreign exchange at National Australia Bank in Sydney. For Italy, “key for this week is whether a technocrat government can be quickly formed. If it can’t, banking sector worries will jump to the fore and that can add to downward pressure on the euro,” he said.

Euro Parity in Play for Traders as Italy Succumbs to Populism

Renzi lost the referendum on constitutional changes by 60 percent to 40 percent, with almost all votes counted, and said he’d tender his resignation to the president later Monday. The euro dropped as much as 1.5 percent to $1.0506, approaching the March 2015 low of $1.0458, which was the weakest since January 2003. The shared currency was down 1.2 percent at $1.054 as of 1:22 p.m. in Tokyo on Monday.

“The first reaction to Renzi resigning is euro selling, but the more important event is the dissolution of parliament and general election, which may not occur until 2017,” said Daisuke Karakama, chief market economist for Mizuho Bank Ltd. in Tokyo. The string of European elections next year “will keep the euro pressured,” he said.

The euro may drop as low as $1.02 in the first three months of next year, but parity is unlikely considering it didn’t happen even at the height of the European debt crisis, Karakama said.

“If election results in France and Germany were to raise the risk of these countries leaving the EU, then the euro could collapse, but we are not even at a stage to talk of such a scenario,” he said.