Sunday, April 24, 2011

Eurozone Current Account and EUR/USD Comparison (1999 - 2010) - April 24, 2011

Data Source: ECB

Between the colored regions is when the EUR/USD rallied in a general uptrend. Below the EUR/USD Chart is the Eurozone Current Account and below are the components of the Current Account (Net good and services - good exports minus good imports and service exports minus service imports, Net Income, and Net Transfer Payments)

Some Fundamental Observations:
  • The Current Account does not give good fundamental support alone in explaining EUR/USD trends up.
  • The net Goods component of the current account is probably the best fundamental indicator of what supports the EUR/USD trends up out of the Current Account. 
    • Every time the net goods component was positive (Exports in goods > imports of goods; a.k.a more euros into the zone) or rising from negative to positive, there was a strong general uptrend in the EUR/USD
  • The onset of the sub-prime crisis leads to much greater negative net factor income and net transfer payments
    • Into 2011 well into the sovereign debt crisis; net factor income volatility appears to be decreasing and starting to turn positive (a.k.a Eurozone starting to receive more capital back on investments/remittances vs. payout them out more as seen through the sub-prime/financial crisis 2007 - 2009)
    • Net Transfer Payments grew larger and larger as the Eurozone grew, and was possibly exacerbation by the multiple financial shocks in the past three years. Net Transfer Payments remains elevated. 

The most stable period of Eurozone growth appears to be between 2002 and 2004 (green), as the trade balance in both goods and services were positive (especially with goods primary driver), while net income and transfer payments, though negative, were not volatile and large enough to weigh down the current account. As we see post 2006 all three components of the current account become much more volatile. 

After 2006 the Current Account (CA) is not primarily reflected by the trade balance. The trade balance becomes more volatile plus Net Factor Income (NFI) and Net Transfer Payments (NTP) become much larger negative components of the CA. 

However, despite such a fundamental divergence the Euro rallies to all time highs (from 2006 to 2008 from 1.20 to 1.60 - yellow). The rally in the EUR/USD is reflected when the net goods component goes from positive to negative. 

The subsequent shorter rally in 2009 (EUR/USD about mid 1.20s to about 1.50 -blue) is again supported with a sharp reversal in negative net goods to positive net goods (about -11B euros to +15B euros)

The last period I highlight as a general up trend is interesting in that we are seeing a sharp reversal in net goods from Jan 2011 to Feb 2011 from about -14B euros to about -993M euros, but do not have positive net goods yet. 


I have not calculated the data sets, but I would logically assume the exchange rate value is the catalyst for trade movements. Therefore, if the EUR/USD is posting higher highs up to 1.50 resistance and the net goods component of the CA remains below +5B euros (past rallies in EUR/USD eventually posted greater than 5B euros net goods), there will be a sharp reversal in the EUR/USD at 1.50. 

If net goods continue to trend higher beyond 5B euros, it is possible the EUR/USD rally is fundamentally sound and continue beyond resistance. Continued higher highs on the EUR/USD without fundamental support would just be sentiment and speculation and subject to a strong mean reversion. 

Keep in mind of course the nature of the trade data is reported late, and that sentiment can sustain currency rallies on months end before correcting. 

Analyze Capital LLC

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