Synopsis:

SocGen highlights the strong balance of payments data from Europe, which is helping to support the euro. Despite the euro's significant drop in 2022, the recent recovery in Europe's trade position and balance of payments suggests that the euro is stabilizing and may have room to strengthen further.

Key Points:

• Strong Current Account Surplus:

  • Europe’s current account surplus reached an impressive EUR 51bn in June, amounting to EUR 370bn (2.5% of GDP) over the 12 months to June.
  • European Monetary Financial Institutions (MFIs) increased their holdings of foreign assets by EUR 547bn in the last year.

• Impact of 2022's Euro Collapse:

  • The euro fell sharply from 1.24 to 0.96 against the dollar in 2022 due to a severe terms of trade crisis and a strong US economic recovery.
  • Since then, the terms of trade have improved, and the trade position has recovered, though the euro is still only halfway back to its previous level against the dollar, now trading around 1.10.

• Potential for Further Euro Strength:

  • If Europe could combine its balance of payments strength with stronger domestic demand and investment, the euro could potentially rise to USD 1.30.
  • However, even without these factors, the robust balance of payments data helps to establish a strong floor under the euro, limiting its downside.

Conclusion:

SocGen suggests that Europe’s impressive balance of payments data is helping to put a floor under the euro, supporting its current levels and potentially leading to further strength if domestic demand and investment increase. Despite the euro's partial recovery from the 2022 shock, the strong balance of payments position is a key factor stabilizing the currency.