According to our FX strategists, the ECB on the sidelines and the ballooning current account surplus are bullish forces for the euro.
The European economic recovery is proceeding and the ECB kept policy on hold last week. Unless Europe relapses into a recession (resulting in pronounced deflationary pressures), the ECB will remain on the sidelines. Therefore, with the Fed’s balance sheet still expanding, relative monetary policies will continue to exert upward pressure on the euro. It will take a renewed expansion in the ECB’s balance sheet or a re-escalation of sovereign debt concerns to weaken the euro materially.
Our FX strategists believe that the most under-appreciated bullish development for the euro is the ballooning current account surplus. At nearly 0 bn, the eurozone is the largest current account surplus economy in the world, surpassing even China. Also, the eurozone’s surplus compares to a current account deficit of near 0 bn in the U.S. There is a huge 0 bn difference between the U.S. and eurozone’s external balances. This means that the U.S. needs to attract 0 bn of capital inflows just to be on par with the eurozone’s current account surplus.
[Hear More: Ronald Stoeferle: Monetary Tectonics - The Tug of War Between Inflation and Deflation]
Moreover, Europe’s current account surplus could see the euro strengthen should risk aversion rise. In the past, the Japanese yen tended to appreciate during periods of stress in global financial markets. This was not because foreigners were buying the Japanese yen and JGBs as a safe haven. It was because Japanese investors refused to recycle their current account surplus into “risky” overseas assets. Japan’s excess savings got trapped within the country, causing the yen to strengthen. The euro may begin to display similar characteristics to the yen now that it is running an enormous current account surplus.
For these reasons our FX strategists remain bullish on EUR/USD.
