(Adds trader and analyst comment, more details on price moves)
By Patrick Graham and Jemima Kelly
LONDON Nov 28 The cost of hedging against
swings in the euro's value over the coming week jumped by the
most in months on Monday ahead of an Italian referendum that
could prompt Prime Minister Matteo Renzi to resign.
Options market pricing showed a surge in the cost of hedging
against volatility in the euro's exchange rate to the safe-haven
yen over the next seven days, for the first time
covering the referendum on Sunday.
Implied volatility against the dollar also jumped
but was still slightly less pronounced, pointing to doubts among
speculative investors about whether the referendum would create
clear and immediate threats to Italian debt markets and the euro
Italy, Austria and a host of other euro zone countries saw
their cost of raising debt compared to benchmark borrower
Germany increase on Monday ahead of the first of many political
tests due in the coming months.
"There is plenty of risk priced in and people have been
focused on it," said the head of hedge fund currency sales with
one large international bank in London.
"But if anything I would say there is more priced in to the
3-month, which takes in more of the Europe-wide political risks
we have ahead. It does look to us like it will be a slow-burner
(for the euro)."
One-week euro/yen implied volatility rose to as much as
14.375 percent, its highest in more than two months
One-week euro/dollar implied volatility also jumped by the
most in five months, hitting 12.480 percent, the
highest since the night of Donald Trump's victory in the U.S.
elections earlier this month.
Three-month paper has been trading at or close to
its highest levels since the Brexit referendum in June for the
past 10 days and was also on the rise on Monday, even as spot
rates for the euro strengthened.
"Since the U.S. presidential election, market attention has
shifted to European political risks, prompting investor demand
for euro vols," said Credit Agricole strategist Stephanie Hau.
"In particular, the French presidential election next year
has attracted the most interest." The second round of the French
presidential vote will be on May 7.
Renzi has promised to step down if he does not win the vote
on constitutional reform, opening the way for renewed political
instability in the eurozone's third largest economy and
prompting fears of bank runs and credit rating downgrades.
But the broader risks that poses - of a future government
potentially taking Italy out of the euro, or taking policy moves
that lead to markets forcing it towards a debt default - may
take time to crystalise.
"There's a broad consensus that 'No' wins this, and so
exactly what?" said Kit Juckes, a strategist at another French
bank, Societe Generale, in London.
"Markets are uncertain about what it means for the credit
rating, does he resign, doesn't he resign, does that cause an
election or doesn't it? Even if he does resign and it doesn't
cause an election, what does that mean in terms of the issues in
the banking sector? That's the thing - there's much more
uncertainty than something as simple as the Brexit referendum."
(Reporting by Jemima Kelly; Editing by Tom Heneghan)