EUR: Balance of payments comes provided some relief - SocGen

Euro bulls did get some mildly helpful news yesterday from the latest balance of payments data, according to Kit Juckes, Research Analyst at Societe Generale.

Key Quotes

“Since the start of 2015, the ECB has held the euro down through a combination of negative interest rates and large-scale bond purchases. More recently, their task was made easier by the rise of political risk in Europe ahead of the French elections. All of this was visible in the historically wide Treasury/Bund yield spread, and in balance of payments data that have seen outflows of money from Euro-denominated assets.”

“Over the course of 2015 as a whole, European investors shifted over EUR 1.2trn into foreign bonds, equities and direct investments. That number fell to EUR 722bn last year, but net foreign investment into Europe slowed too – form EUR 887bn to just EUR 63bn. The combined net exodus of long-term capital peaked at EUR 730bn in the year to last October but April data show it falling back to EUR 580bn in the year to April. Still plenty big enough to recycle a EUR 352bvn current account surplus, but the gap is starting to narrow.”

“The net bond outflow is down to EUR 525bn in the last year, from a peak of over EUR 720bn in the year to September. Europeans’ net buying of foreign bonds slowed to EUR 306bn in the last year, down from a peak of almost EUR 500bn. Foreign sales of European bonds have stabilised at EUR 220bn per annum. As long as the outflows are bigger than the current account surplus, you can argue that the balance of payments remains a net negative for the euro. But the gap is closing and when it has finished doing so, the danger of a sharp EUR rally will increase.”