Mid-term flows turning EUR negative as EUR basic balance deteriorates – Nomura

By FXStreet FXStreet (Delhi) – Research Team at Nomura, suggests that EUR/USD weakness since mid-2014 can be explained by monetary policy divergence, but international flows have also become more EUR negative.

Key Quotes

“In fact, the basic balance is now moving from net inflows to neutral or even net outflows. From this perspective, EUR weakness since mid-2014 can be explained by: 1) the acceleration of fixed income outflows from the euro area, 2) the slowdown in foreign investment in euro area equity investment since Q2 2015, and 3) M&A outflows from the euro area into the US.

Although the current account surplus widened, increased capital outflows offset the increase in the surplus. We expect fixed income outflows to remain strong in the euro area this year, while the current account surplus is unlikely to improve further. Mid-term EUR flows are likely to remain weaker than previous years, putting downward pressure on EUR in 2016.

(Fixed income flows) We believe the acceleration in fixed income outflows has been the key flow cause of EUR weakness. Foreign investors likely turned net sellers of euro area bonds in 2015 for the first time since the introduction of EUR.

In contrast, euro area investors’ foreign bond investment has …read more

Source:: FX Street