Repatriation Amid Risk-Off: What EZ BoP Means For EUR/USD - BNPP

Repatriation Amid Risk-Off: What EZ BoP Means For EUR/USD - BNPP

22 March 2016, 09:00
Vasilii Apostolidi

The eurozone’s balance of payments (BoP) data for January is consistent with the view that eurozone investor appetite to chase higher returns in foreign debt markets will moderate in periods of risk-off, leaving the EUR supported by its large current account surplus.

In addition, we highlight the following points: The financial account shows net debt portfolio inflows of EUR 10.2bn, which represents the first net debt inflow since the ECB started their asset purchase programme.

The breakdown of debt portfolio investment shows eurozone investors (who likely have low currency hedge ratios) were net sellers of foreign debt (EUR 13.7bn) for the first time since October 2013.

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Therefore, the data is very consistent with the idea that eurozone investor demand for foreign debt will moderate in periods of risk-off, resulting in EUR outperformance due to the large current account surplus.

The current account (CA) surplus fell to EUR 25.4bn (sa) in January, from EUR 28.6bn in December.

The broad basic BoP recorded a EUR 39.3bn (nsa) deficit. However, this was driven by foreign investors selling net EUR 41.8bn of eurozone equities (again consistent with risk-off). Foreign investor positions in eurozone equities are likely to have high currency hedge ratios, resulting in an inverse relationship with the EUR.

We continue to anticipate further EUR strength versus the USD in the near-term, forecasting EURUSD at 1.14 by the end of this month and 1.16 by mid-year.

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