Parsing the Eurozone's Current Account Surplus

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Marc Chandler

NEW YORK ( BBH FX Strategy) -- On Monday the eurozone reported that its January current account surplus of 4.5 billion euros was its largest in almost five years.

The December surplus was revised to 3.4 billion from 2.0 billion initially. The monthly swings of the time series can be misleading due to seasonal factors and the schedule of transfer payments.

The 12-month cumulative deficit was 21.2 billion in January 2012, vs. 50.6 billion in January 2011.

Growth differentials have seen the U.S. current account deficit widen, and the same considerations would seem to favor an improvement in the eurozone's external position.

Yet given that cross-border capital flows are many times larger than flows of goods, in our explanatory model of currency movements we tend to put more emphasis on capital flows than trade flows.

The eurozone reported a new outflow of portfolio capital in January. The 46.9 billion euro outflow contrasts with a 4.6 billion inflow in December.

This consisted of an outflow of 51.9 billion from the debt market and a 5.0 billion inflow into European equities. By comparison, in December, 12.9 billion flowed out of the eurozone debt market and 17.4 billion went into the equity market.

For its part, the euro fell 3.6% against the dollar in December, when the eurozone reported new portfolio inflows. It fell 1.4% against the dollar in January when the eurozone reported large portfolio capital outflows.

It seems that foreign investors took advantage of the long-term refinancing operation-induced bond market rally to liquidate exposure. In January, European investors renewed their foreign bond purchases, for the first time since July 2011.

Before the crisis, eurozone officials played down the significance of internal imbalances and may be overcorrecting for them now. Part of the criticism levied is that while the debtor countries are adopting austerity, the creditor countries are reluctant to adjust.

The Bundesbank's latest monthly report claims that Germany's current account surplus with other eurozone countries has fallen in roughly in half since the 2007 peak. Again, growth differentials seem to point to that direction.

The fact that Germany's overall current account surplus has not changed much over the past five years suggests it has diversified its exports away from the eurozone. China is a likely suspect. Germany accounts for 40% of eurozone exports, and the eurozone's trade deficit with China in 2011 fell to about 102 billion euros from almost 148 billion euros in 2010.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.