The Euro: Ready for a Rebound?

Mid Week Bond Update

The Euro: Ready for a Rebound?

Despite the downbeat environment, sentiment and potential for fundamental improvement could work in the currency's favor.

U.S. dollar-denominated assets saw solid appreciation over the past year – as did the U.S. dollar itself[1],  with economic news for the period largely favorable to the U.S.

The euro, in contrast, has steadily eroded against other major currencies, joining as has the Brexit-beleaguered British pound over the past year.

But despite lagging growth and near-zero interest rates in the eurozone, there are reasons to consider the case for a rebound in the euro, on the basis of both fundamentals and contrarian sentiment.

Euro Area Net International Investment Position, 1999 – 2018

Chart: Eurozone: Current Account Balanc (% of GDP)

Chart courtesy of Brandywine Global. Source: Macrobond; data as of 12/31/2018.  Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.


As noted by Brandywine Global, the eurozone is presently running a current account surplus, saving more than it invests. Over time, these recurring surpluses has helped improve the region’s net international investment position, and could push that net position into positive territory. That would, in turn, allow the eurozone to become a net supplier of capital to the rest of the world which would, over time, create increased demand for euro-denominated assets, and therefore, for the currency itself.

These are trends that would take years to unfold, and are unlikely to nudge the euro higher in the short run.  But given today’s deeply negative sentiment, even incremental improvements could set the stage for a contrarian rebound, eventually followed by a fundamentals-based trend.

On the rise: “Green” bonds

Demand for the recent issuance of 20-year “green” bonds by AAA-rated Netherlands far outstripped supply. The country's treasury department planned for an offering in the range €4- to €6-billion; the sale was met by more than €21 billion of orders. The final issued amount was €6 billion.

Bonds are considered “green” if a portion of their proceeds are earmarked for ecology-related projects.  In the case of the Netherlands bond issue, bidders for the bonds received preferential treatment if they could prove their ecological credentials, receiving an extra 10% of their requested allocation of bonds.  According to the issuer, 82.5% of the bids came from what it called “green real money accounts”. However, this class of investors accounted for only 28.5% of the bonds actually allocated in the auction.

This week’s issue wasn’t the first “green” sovereign bond, which was issued by Poland in 2016. However, the Netherlands offer was the first issue from a AAA-rated country, and the first to show a preference to “green” investors.

 On the slide: U.S. business tax intake

The Internal Revenue Service (IRS) 2018 “Data Book”  released this week showed tax collections from individuals and businesses of roughly $3.5 trillion 57% of that came from individuals and 33% from employment taxes. Another 2% or so came from estate, gift and excise taxes.

The remaining nearly 8% came from corporations, their lowest share since at least 1960. These figures weren’t adjusted for refunds to businesses, which amounted to some $60 billion, driving the net amount collected from businesses to some $203 billion, somewhat below 6%.

All data Source: Bloomberg as of May 21, 2019 unless otherwise specified.

1 Between May 21, 2018 and May 21, 2019, the dollar has risen 4.74% against a basket of other currencies; the Bloomberg Barclays U.S. Aggregate Bond Index has risen 6.35% over the same interval.


All data Source: Bloomberg as of May 21, 2019 unless otherwise specified.


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