- Data suggests EUR/USD equilibrium could be higher than market consensus

- Highest rolling surplus on record

- Italy no existential threat to the Eurozone

Image © Open Water, Adobe Stock

The Eurozone remains an export powerhouse, and those watching the Euro exchange rate complex should take note we are told.

The Eurozone has recorded a fresh set of impressive Balance of Payment figures that shows the regions current account surplus stood at €32BN in March after recording €36.8BN in February.

According to data from the European Central Bank, the surplus rose by around €4BN cumulatively last year (2017) despite the fact that the economy grew at a significantly above-trend pace.

The strong numbers reflect a surplus from the trade in goods (€30.2BN), services (€9.4BN) and primary income (€3.9BN).

In short, the Eurozone is exporting more than it is importing, and importantly, the data has some potentially significant implications for the future direction of the Euro we are told.

"If you thought this was an indication of a downward sloping profile for the series you'd be wrong. On a rolling 12M basis, the surplus was at €410BN in March (highest on record). That’s approximately 4% of 2018 (estimated) Eurozone GDP, which is also the highest on record," says Stephen Gallo, an analyst with BMO Capital Markets in London.

Gallo notes the data as suggestive that the long-term outlook for the Euro is positive, based on the data alone saying, "I just don't think pundits who believe equilibrium in EUR/USD is in the $1.23-1.24 range are looking closely enough at the BoP. My view is that long run 'fair value' is probably higher than that."

And, another Euro-positive story identified by Gallo is that the portfolio investment balance is turning around:

"Since I do not think Italy poses an existential threat to the Eurozone in the short-run, the recent back-up in Italian yields should attract more interest from abroad. Gross portfolio investment showed an inflow of €63BN in March. This helped the balance on long-term debt flows rise to €16BN in March from an outflow of €39BN in February. That’s the first positive reading on that balance since November of 2016."

The portfolio investment balance forms part of the Financial Account which, with the Current Account, form the overall Balance of Payments.

Often, countries with a strong Current Account have a counterbalancing Financial Account, and vice versa in the case of the United Kingdom whose Financial Account tends to offset the country's sizeable Current Account Deficit.

That the Eurozone is seeing an improvement in its Financial Account could therefore bode for a well-supported Euro going forward.

Behind the Eurozone's impressive Balance of Payments data is the contribution of Germany which remains an export powerhouse, in March the country exported goods to the tune of €116.1BN, and imported goods to the tune of €90.9BN according to data from Destatis.

According to provisional results of the Deutsche Bundesbank, the current account of the balance of payments showed a surplus of €29.1BN in March 2018, which takes into account the balances of trade in goods including supplementary trade items (+€26.8BN), services (–€0.9BN), primary income (+€6.9BN) and secondary income (–€3.8BN). In March 2017, the German current account showed a surplus of €32.7BN.

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