The current account balance of payments for July was released today, a good metric to measure any change in regards to the ECB monetary policy. It helps us to measure any potential capital inflow or outflow. The July data has seen an increase of the current account balance to €8.625billion from €5.257 billion. Inflows towards the eurozone are increasing at a faster pace.
Those inflows are mostly due to strong market expectations that the ECB will start tightening its monetary policy by announcing a reduction of its asset purchase program at its next meeting. The ECB monetary policy has largely driven money towards the global bonds market over the past few years, which has seen a significant rise. Any further tapering would likely push investors to unwind their foreign asset position and drive money back to the eurozone.
As a result, we believe that upside pressures on the Eurodollar pair are very likely to continue despite the fact that the rate differential between the US and the EU is rising, in particular the front-end of the US yield curve. Anyway, the rate differential is not a great metric for estimating future currency demand. We keep on considering that the state of the US economy is overestimated and that investors are keen to unwind their long dollar position. A Eurodollar at 1.23 represents a decent medium-term target.