Shifting of capital inflows into the USA?


The release of yesterdays US-trade figures showing a record deficit of 34,2 billion USD highlights the need of the USA for further sustained capital inflows.

The analysis of capital inflows out of Euroland, which was the most aggressive provider throughout the last 23 months, clarifies that portfolio flows have shrunk significantly.
Also FDI flows are expected to have peaked in the third quarter.

The last 6 months saw the oil-producing countries stepping partly into Euroland's role as provider of funds. The tripling of oil prices since the introduction of the Euro also tripled the oil bills denominated in USD. The windfall revenues have partly been reinvested in the USA and are currently an increasing part of the funding of the US current account deficit. Due to the winter season in the northern hemisphere this environment will be ongoing for at least another 6 weeks keeping oil prices at high levels and implying further USD demand.

With the next year this impact is seen fading. Oil-price targets of the OPEC at 22-28 USD per barrel imply a softening demand situation during springtime.
This scenario raises the question who else may contribute to the funding of the ever-growing US imbalance.

Japan provided these funds throughout the 1980 s. The following decade was characterized by partly withdrawal and repatriation.
The current situation in Japan calls for new recipes and plans to counter the ongoing sclerosis. Devaluing the JPY seems a policy that promises at least more than yet another official spending program. This policy is likely to provide windfall profits to Japanese corporations and financial institutions entitling them to recapitalize. The criticism by US officials of a falling JPY is expected to be rather shallow on back of the need to fund the current deficits. Thus the probability of Japan being the main provider of the funding is rising substantially.



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The implications for foreign exchange markets are likely to see a reversal of the current downtrend of EUR-USD and also a bounce of USD-JPY.
The latest upswing of USD-JPY bouncing through resistance at 110 may be indicative. In this respect only corrections below the support zone at 106,50 are seen as neutralizing the current scenario.

[b]
Gruß

ufi

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