It is no secret that there was a huge economic divergence between the “Club Med” countries of Southern Europe like Spain, Portugal and Italy and the industrialized north. The rapid acceleration to the downside in the European economy has compounded the divergence as investors fear the euro itself could come into question as convergence between European economies turns back to divergence.
A case in point is the widening spread between German bond yields and those in Italy. At the close, Italian debt yielded over 141 bp more than comparable German debt. This is the most since before the launch of the euro in 1999. Yields should be close to par in a currency union. Clearly, investors are hedging their bets that the euro will survive for richer or poorer. All was well when we were rich but there not so hot with the economy in a ditch.
EUR/USD trades with an offered tone, now at 1.2642. We’re approaching the lows seen shortly after the very poor US employment report.
