Kudos to George Saravelos at Deutsche Bank for calling out Europe’s euroglut problem more than a year ago — because, as Saravelos was keen to point out on Tuesday, what was once a thesis is now a reality.
As he notes:
The Eurozone has experienced a historically unprecedented shift in portfolio flows, with net fixed income outflows running at a staggering 500bn EUR over the last twelve months, the largest on record. These flows are mostly directed towards US bond markets and have exceeded the Eurozone’s current account surplus. They have pushed the basic balance into deficit over the past year contributing to EUR/USD weakness.
Like many of the US presidential candidates who didn’t come to Camp Alphaville earlier this year, Ted Cruz has a radical plan to alter the tax code: slash taxes on income, make it easier to save in new tax-free accounts, and make up much of the difference by introducing a sizable value-added tax.
Our first thought was that this ought to have a big impact on the US current account balance. Others may care more about the impact on the federal budget balance or aggregate incentives to work and invest, but we just can’t help bringing everything back to the balance of payments. And to us, Cruz’s plan sounds a lot like a “fiscal devaluation”. In fact, it could offset the impact of the strengthening dollar. Read more
China weakened the renminbi fixing by 1.86 per cent overnight, an unexpected move followed by the biggest one-day change in the value of the renminbi since the country abandoned its dollar peg for a managed trading band.
There are two schools of thought on this: Either balance of payment problems are forcing China’s hand, or the move is just another step in the slow and benign process of capital liberalisation.
On the first, well hey, they would depreciate in the current environment wouldn’t they? Exports are weak, the economy is sputtering, and the stock market can’t stay up without the state introducing a ban on it going down.
Move to a free-floating currency system? Meh. This is just another desperate devaluation story in the style of Nigeria, Russia before them and even peg busting Saudi Arabia on the back of a hard-currency drought in the offshore FX market. (FT Alphaville has predicted this for like ages, yeah?). Read more
Dark matter may more commonly be associated with physics, space exploration and Professor Brian Cox, but, according to Deutsche Bank’s FX strategist George Saravelos, there’s a good chance that it’s becoming a recognisable force in the world of foreign exchange too.
Of course, whilst you need complex structural analysis of the universe to detect the real dark stuff, in FX its presence is arguably more easily sniffed out. Mostly, says Saravelos, via the closer inspection of short-term derivative flows and the murky parts of balance of payment statistics. Read more