Italian election deadlock spooks market
Australia's share market lost 1 per cent on Tuesday after Italy's election saw disgraced PM Silvio Berlusconi locked in the lead with former comedian Beppe Grillo.
This stoked fears among investors and initially wiped 1.5 per cent from the value of the bourse. Despite staging a fightback through the day the bourse closed 1 per cent lower overall.
The jitters came as the Reserve Bank warned the cash rate could be used to offset the impact of a high Australian dollar.
These comments, and suggestions the RBA could intervene in currency markets if conditions demanded it, drove the dollar down to below US102.5¢.
Robert Rennie, Westpac's chief currency strategist, said Italy's deadlocked election result would rattle financial markets because it heralded a deterioration in European politics.
"The idea that Berlusconi was finished will now need to be rethought," he said.
"Financial markets will now have to take at face value the idea that the protest vote can actually attain an overall majority in some parts of Europe's legislature. This is indeed a worrying development and one that should rattle financial markets for some time to come."
RBS's senior foreign exchange strategist, Greg Gibbs, said it was unclear how the European Central Bank would respond to events in Italy.
"[Italy] may be ungovernable and [the election result] creates a sudden descent back into uncertainty over the future of the economic policy direction in Italy and the willingness of the ECB to . . . support the Italian bond market."
Comments from RBA assistant governor Guy Debelle that Australia's dollar was higher than it ought to be raised the prospect that the Bank could cut rates again.
Mr Debelle said the dollar looked "higher than the state of the domestic economy and the terms of trade would suggest", but this was primarily due to the weak state of some advanced economies and the resulting policies being pursued by the central banks in those countries. "To date in Australia, we have been able to counter the effects of the higher Australian dollar with lower interest rates," he said.
"[And] we still obviously retain scope to lower interest rates further, should the need arise, including to counterbalance the pressures of an elevated exchange rate."
But Mr Debelle also raised the prospect of using the RBA's foreign exchange reserves to intervene in the currency market if conditions warranted.
He said the bank had intervened in the market on a number of occasions in the past two decades to facilitate an orderly depreciation of the Australian dollar.
"The most recent episode of intervention was in 2008-09 ... [when] there were various bouts of illiquidity as stresses flared in global markets, particularly following the failure of Lehman Brothers," he said.
The other time was in 2001, when the dollar hit an all-time low of US47¢.
Mr Debelle also defended the RBA's actions last year when a foreign customer bought a large amount of Australian dollars and the RBA decided to keep the foreign exchange rather than sell it back to the market.
Frequently Asked Questions about this Article…
The article describes a knife-edge Italian election that left former PM Silvio Berlusconi locked in the lead alongside protest candidate Beppe Grillo. That result raised fears the eurozone debt crisis could resurface, creating political uncertainty in Europe that rattled financial markets.
Australia's share market lost about 1% on the day of the result. The bourse initially fell around 1.5% before staging a partial recovery and closing roughly 1% lower overall, as investors reacted to the increased geopolitical and market uncertainty.
Comments from the Reserve Bank of Australia and concerns about the election drove the Australian dollar down to below US102.5¢. RBA remarks that the cash rate could be used to offset a high dollar and hints at possible intervention also influenced the currency move.
Yes. RBA assistant governor Guy Debelle said the dollar looked higher than domestic conditions and terms of trade would suggest, and he noted the RBA still retained scope to lower interest rates further if needed, including to counterbalance pressures from an elevated exchange rate.
According to the article, the RBA could intervene using its foreign exchange reserves if conditions warranted. Debelle said the bank has intervened on a number of occasions over the past two decades to facilitate an orderly depreciation of the Australian dollar.
The article cites RBA interventions in 2008–09, during bouts of illiquidity after the failure of Lehman Brothers, and in 2001 when the dollar hit an all-time low of about US47¢. It also notes a recent episode where the RBA kept a large foreign-exchange purchase rather than selling it back to the market.
Westpac's chief currency strategist Robert Rennie said the result signalled a deterioration in European politics and warned markets would need to reconsider that Berlusconi was finished. RBS's senior FX strategist Greg Gibbs said it was unclear how the European Central Bank would respond, raising uncertainty over the future of Italy's economic policy and ECB support for the Italian bond market.
The article suggests investors should expect heightened market volatility when political risk in major economies rises. Policymakers like the RBA may respond with rate adjustments or FX intervention, so investors may want to monitor central bank commentary, currency moves and developments in European politics closely.
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