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Mix-Ansicht- Euroland Capital Account provide positive Euro news - Cosa, 30.05.2002, 10:16
Euroland Capital Account provide positive Euro news
<font size="4">Euroland Capital Account provide positive Euro news.</font>
By Hans Guenther Redeker from BNP
The analysis of Euroland's current and financial account data released yesterday provides further good news for the euro. The first quarter current account surplus came in at EUR4.3bn, compared to a deficit of EUR10.5bn the year before. However, the financial account comprising direct investment, portfolio investment, financial derivative investment has swung back into the red. While an EUR30.6bn surplus was reported in the first quarter last year, a deficit of EUR12.3bn has been recorded in the first three months of this year. Nonetheless, a detailed analysis of the financial account data does reveal some interesting shifts, of which the most important are seen in the portfolio and the other investment section.
The portfolio related outflow from Euroland has increased from EUR38.5bn to EUR43.0bn when comparing first quarter results of 2001 with 2002. But, the equity flow deficit has been sharply reduced and given that European markets have started to outperform their US counterpart, it would not surprise if equity flows moved into surplus in the second quarter (March net portfolio inflows are already running at EUR8.1bn). On debt instruments the deficit widened from EUR28.1bn to EUR42bn, but the widening of the deficit was entirely due to money market instruments, while the deficit in longer-term bond maturities was sharply reduced. Corporate bond market investment in the US contributed to last years record deficit in the 'bond and notes' category, but corporate bond market spreads have come down and now offer only a small yield advantage. Even more interesting is that issuing activity in the government bond market has started to increase again.
According to BNPP Economic research, the US public sector deficit should reach USD150bn this year, ending a period of three years of public budget surpluses, which enabled the US government to repay debt. Government bond yield spreads have once again become a leading indicator for currency valuation, but as shown by chart 2, the relationship between government bond yields and EURUSD broke down in 1999. The US debt repayment and the focus on corporate bonds were responsible for EURUSD de-coupling from government bond yields. However, the situation has changed. The US government has stopped debt repayments and has increased bond-issuing activity. Accordingly, government bond market spreads might regain their importance for the EURUSD relationship.
The 10 year US - Euroland government bond spread is 4bp in favour of the euro, which might not be enough to attract sufficient foreign investment to allow the USD to maintain current levels. Our preferred macro scenario suggests bond yields will move in favour of the USD, but could widen to about 150bp before providing USD support.
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