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Eurozone: Re-cycling of current account surplus by investors – SocGen

FXStreet (Delhi) – Kit Juckes, Research Analyst at Societe Generale, suggests that investors willingness to re-cycle a gargantuan current account surplus of Eurozone is likely to keep the Euro relatively soft when markets are buoyant, but periods of sharp Euro appreciation, are likely when investors are nervous.

Key Quotes

“Eurozone current account data for July (here) show a sharp increase in net accumulation of foreign assets which is cementing the Euro’s status as a ‘carry currency’ that correlates with risk sentiment.”

“The net increase in assets is a result of net combined portfolio and direct investment outflows of Eur 331bn in the last 12 months (Eur 791bn increase in European investment abroad, and a EUR 460bn increase in foreign investment in the Eurozone). This has now overtaken the EUR 268.8bn current account surplus of the last 12 months.”

“The big swing factor is that in the last 12 months, European investors have bought Eur 33bn in long-dated foreign bonds, compared to Eur 147bn in the same period a year ago, while foreigners have bought Eur 94bn in European bonds, compared to 180bn a year ago.”

“None of this is necessarily going to tell us where the Euro is heading, but it does show how it is ECB policy that drives the Euro down, while periods of risk aversion can send it up. The correlation between EUR/USD and relative EU/US short rates has weakened and the correlation with risk aversion measures like VIX has either fallen or changed sign.”

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