Focus of the day:
"In the past few years, the euro area’s current account balance has grown to become the largest in the world in nominal terms.
The question this prompts is whether a large surplus will prevent the EUR from weakening further, as our 1.02 12-month EURUSD forecast suggests.
We don’t think the surplus in itself will be an obstacle against EUR weakness, as the rise in net trade inflows is being efficiently recycled via a growing capital account deficit.
Specifically, the data show that a tidal shift is taking place in the portfolio investment account.
European investors are for the first time in 15 years buying more foreign securities than foreign investors are buying with European stocks and bonds.
From a stock perspective, years of being net recipient have created a large portfolio deficit in the net international investment position (NIIP). This deficit provides scope for this trend of rising portfolio assets to extend further – Europeans are arguably “short” foreign portfolio assets.
As long as the recycling mechanism remains efficient, we think a weaker EUR and a current account surplus are not inconsistent with each other."
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