Today has been released the current account of the balance of payments for July which is a good metric to measure any change in regards to the ECB monetary policy. It helps us to measure any potential capital inflow or outflow. The July data has seen an increase of the current account balance to €8.625billion from €5.257 billion. Inflows towards the Eurozone are increasing at a faster pace.
Those inflows are mostly due because of strong market expectations that the ECB will starts tightening its monetary policy by announcing a reduction of its asset purchase program at its next meeting. The ECB monetary policy has largely driven, over the past few years, money towards the global bonds market which has risen significantly. Any further tapering would likely push investors to unwind their foreign assets position and drive money back to the Eurozone.
As a result, we believe that upside pressures on the Eurodollar pair are very likely to continue despite the rate differential between the US and the EU is rising, in particular the front-end of the US yield curve. Anyway the rate differential is not a great metric for estimating future currency demand. We keep on considering that the state of the US economy is overestimated and that investors are keen to unwind their long dollar position. A Eurodollar at 1.23 represents a decent medium-term target.
By Yann Quelenn