Euro Drops as Outlook for Growth, Greek Stability, Bailout Solutions Deteriorate

The Euro took a significant, fundamental hit this past session. Through the end of the day, the currency managed modest gains against the high-yield, investment currencies which speaks to the underlying current to the FX market: risk aversion was in play. Despite the uncertainties surrounding the European economy and financial markets, the Euro nevertheless still outperforms the Australian, New Zealand and Canadian dollars in times of true deleveraging. Against everything else though, the euro is a distinct encumbrance to a portfolio. In the morning, the bearish pressure began with the OECD’s downgraded growth outlook (calling for a 0.1 percent contraction in 2012) and warning that policy officials should be ready with more stimulus. That was followed by a downgrade for Spain by Egan Jones and a surge in rates of auctioned 3-month and 6-month Spanish bonds (though the 10-year yield dropped 20 bps and CDS 44 bps). The full press came in the late US session though when former Greek Prime Minister Papademos said his country was at risk of leaving the Eurozone and it could cost €500 billion to €1 trillion. Over-enthusiastic bulls may expect tomorrow’s EU meeting to yield supportive policy (Eurozone bonds?) but don’t hold your breath.