What Is The Biggest Capital Flight In Europe?

The Forex strategist who predicted more than a year ago in Europe's biggest capital flight said yesterday that it was expected to be a reality.

On Tuesday, George Saravelos, a foreign exchange strategist at Deutsche Bank, released a report that "in the past twelve months, the eurozone has gone through an unprecedented period."

(portfolio flow), with net income from fixed income reaching a record five hundred billion euros.

The current account surplus has exceeded the basic deficit.

The euro has continued to decline against the US dollar as a result of a large amount of capital used to buy US bonds.

In October 6, 2014, Saravelos predicted that Europe would face the biggest capital outflow crisis in history: in the next few years, due to global economic imbalances, with the weakening of the euro, the long end yield decline and the global yield curve flattening, we will see the biggest capital outflow in the euro area history, and European capital will buy large quantities of overseas assets.

Over the past year, China has shifted from an export-oriented economy to a consumer oriented economy, and the national savings rate has decreased.

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This could have adverse effects on the euro's reserve currency.

Reserve currencies are generally issued by countries that attract foreign capital, rather than countries with large capital outflows.

This summer, the institutional turmoil in the euro zone has weakened overseas institutions' confidence in the euro.

At present, the euro accounts for 20% of the global monetary reserves, but this proportion will drop to single digit in the coming year.

In this case, the euro denominated oil trade is not expected to flourishing. On the contrary, we believe that the euro zone will become the "last consumer" in the world.

A few days ago, Saravelos thought his expectations had become a reality and said that in the medium and short term,

The capital outflow is irreversible and the euro will continue to depreciate.

"Euro area capital outflow will continue in the next few years.

A large number of European capital (especially Germany) is used for overseas asset allocation, while US and Asian investors are also withdrawing from Europe.

In addition, the central bank's quantitative tightening policy in the emerging economies accelerated the capital outflow in the euro area.

Without considering the introduction of the easing policy of the European Central Bank in December, the depreciation trend of the euro will obviously continue.

Next year, the dollar parity is expected to fall to the lowest level in 2017, and is expected to be 0.85 against the US dollar.

In addition, the euro's continued demand for foreign capital and bonds will reduce global bond yields in the next few years.

The United Kingdom said New York Fed officials objected to Saravelos's view that the depreciation of the euro was due to the ECB's stimulus policy rather than capital outflow.

In addition, the euro area has always maintained a balance of trade balance.

The outflow of portfolio will be offset by other net capital inflows, such as current account surpluses, so the euro exchange rate will remain stable.

But Saravelos also retorted in the report: "there is no direct cause and effect relationship between the balance of payments and the depreciation of the euro".

First of all, we need to identify the subtle changes in the flow of goods, services and capital in the process of imbalances.

First hypothesis

The demand for European goods (or services) is equal to the demand for foreign assets in the European market.

If overseas markets need more European goods (or services), they need to pay more domestic currencies to enable Europeans to hold more overseas assets, resulting in an appreciation of the euro.

If European market demand increases, they need to sell more goods at a lower price.

Under such circumstances, the current account and financial account surplus will increase, but the euro will depreciate.

In other words, exchange rate movements are always due to changes in supply and demand curve, rather than balance of payments.

In addition, Saravelos concluded that the official concluded that "the depreciation of the euro and the capital outflow are not big" conclusion, because its conclusion comes from observing the overall financial account value of the euro area, which has little change in value.

But this method is misleading because it refers to the capital flow of other financial investments.

We only observe capital flows that reflect the real supply and demand changes in the foreign exchange market, mainly including current account, direct foreign investment and portfolio flows. We get the basic value of the balance of payments and reflect the capital flow in the foreign exchange market.

From this perspective, we believe that the obvious trend of capital flows has taken shape in the past twelve months.

Due to the strong demand for foreign assets by European capital, the basic balance of payments has been broken - the surplus of one hundred billion in mid 2014 has changed to three hundred billion deficit this autumn.

Although it is generally believed that the depreciation of the euro is related to the quantitative easing of the European Central Bank, it is not so much because of the sharp deterioration of the basic balance of payments in the euro area due to the outflow of European capital.