Revisiting The "Biggest Ever Headfake" Out Of Europe

Tyler Durden's picture

About a month ago we suggested that the EUR weakness was perhaps a major headfake as liquidity runs and repatriation flows would sustain a stronger-than-expected EUR (especially relative to the USD). Well, today Deutsche Bank's Macro strategist points out that French balance of payments data was hugely revealing about this potential source of strength. While we note that EURUSD remains hugely disconnected from its empirical relationship with sovereign spreads (GDP-weighted), swap-spreads, financial-to-corporate risk differentials, and equity prices - it seems the the typically negative investment abroad (outflows) has now seen 4 months of inflows (too long a period to be simply noise) and with considerable size also. While DB's analysis offers little guidance on when this period of repatriation will be over - we suspect there is more support to come than many expect - even as everything points to a weaker EUR. One broad conclusion is that the EUR is probably the worst instrument to express negative EUR area views, with both periphery bonds and equities purer gauges of stress.


Monthly data shows that France is the biggest source of portfolio repatriation flows with EMU by a considerable margin.

Italy, Spain and Germany have seen net portfolio outflows running at 3m averages of EUR 3bn, 4bn and 4bn respectively, very modest when compared with France

Deutsche Bank's Alan Ruskin summarizes the flows as follows:


  • Although it is not clear how much portfolio liquidation results in a foreign exchange transaction, particularly if assets are funded in the same currency, the latest data would then fit again with the FX Daily from 9 November that highlighted some of the differences between the US and EUR balance payments inclusive of the C/A+FDI and related bond flows as the best explanation for EUR resilience. However, the latest numbers do challenge the thesis that as problems reach the core countries and the EUR area acts as less of a self contained area (with EUR periphery outflows no longer mostly ending up in the core, but all areas seeing net outflows) that the EUR will automatically come under more pressure.
  • The repatriation arguments would tend to suggest that outflows from the periphery and the core will not be enough to sink the EUR until such time as we also see repatriation flows dry up. When will repatriation dry-up involves assessing what the desired stock adjustment of assets might be, in a world of persistent EUR turmoil, and is beyond the scope of this piece.
  • One broad conclusion is that the EUR is probably the worst instrument to express negative EUR area views, with both periphery bonds and equities purer gauges of stress.
  • The portfolio data would fit with the DB Select data that suggests that leveraged funds have their EUR fund on, but are getting no joy, because of both the broadly flat underlying EUR area basic balance position, in combination with net portfolio inflows, partly related to the repatriation story.
  • In general it would be expected that repatriation flows, to support year-end window dressing should offer the EUR a degree of support in the coming month. Even from a medium-term standpoint, this would play to selling realized volatility, since the EUR crisis will provide plenty of constraint to EURUSD’s upside, while the above story suggests there is some less visible protection on the admittedly much more vulnerable downside.

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Unprepared's picture

Of course, transfusion is bullish.

FinHits's picture

I applaud ZeroHedge: Euro area weakness does not manifest through a weak EUR currency rate, unfortunately. This makes the mess even worse, since depreciating EUR would be the only realistic way to get the Eurozone competitive again.

olo - that's the bird's picture

It would be equally stupid to express bearish euro sentiment by shorting italian bonds. Particularly when the ecb makes it clear where the floor is at. Draghi taking care of vampire squid. Just like paulson letting lehman go to give the world a glimpse of what it would look like. Thus saving vampire squid cause we know that will never happen.

kito's picture

really....all is well in italy...soup kitchens in rome are good for gdp...


seems bank runs in italy have begun.....

flacon's picture


Many Italians have begun taking their money out of banks, fearing reports that measures to help fight the sovereign debt crisis might include deductions from bank accounts, as was done in the 1990s.

"They are putting it under the mattress, or even inside empty wine jugs in the cellars. We are a country of farmers"



"A sentiment of trust in the legal money of the State is so deeply

implanted in the citizens of all countries that they cannot but believe

that some day this money must recover a part at least of its former value.

To their minds it appears that value is inherent in money as such, and

they do not apprehend that the real wealth, which this money might have

stood for, has been dissipated once and for all.

This sentiment is supported by the various legal regulations with which

the Governments endeavor to control internal prices, and so to preserve

some purchasing power for their legal tender. Thus the force of law

preserves a measure of immediate purchasing power over some commodities

and the force of sentiment and custom maintains, especially amongst

peasants, a willingness to hoard paper which is really worthless...

If, however, a government refrains from regulations and allows matters to

take their course, essential commodities soon attain a level of price out

of the reach of all but the rich, the worthlessness of the money becomes

apparent, and the fraud upon the public can be concealed no longer."

John Maynard Keynes, Economic Consequences of the Peace, NY, 1920, p. 239-40




bonderøven-farm ass's picture

I am glad to have drunk water so long, as I prefer the natural sky to an opium-eater’s heaven, - would keep sober always, and lead a sane life not indebted to stimulants. Whatever my practice may be, I believe that it is the only drink for a wise man, and only the foolish habitually use any other. Think of dashing the hopes of a morning with a cup of coffee, or of an evening with a dish of tea! Wine is not a noble liquor, except when it is confined to the pores of the grape. Even music is wont to be intoxicating. Such apparently slight causes destroyed Greece and Rome, and will destroy England and America. THOREAU( THE JOURNAL,SEP 19,1850).  ~ H.D. Thoreau

Cult_of_Reason's picture

When everyone gives up shorting EUR, it will violently break down.

luna_man's picture


"Cult_of_Reason"...Ain't gonna happen!..."SHORTS" will be the reason for "violent break down"!!


We got 'em on the run folks!...Patience...They push, we pull...RIGHT?

Cult_of_Reason's picture

There are limits as for how long they can keep propping up this fantasy fiat.

Eventually, EUR will violently break down to reality.

SRVDisciple's picture


Noob here again.

Just how does one make money when the EUR does this violent breakdown?

Is there a way to buy puts on the EURUSD? Is there an ETF that plays opposite of the EUR?



Billy Bob's picture


For your infomation, the FXE is optionable.........and it tracks the Euro almost bip for bip



SRVDisciple's picture

Thank you, sir!

(are you the guy who owns the world's largest honky tonk?)


GeneMarchbanks's picture

'Italy, Spain and Germany have seen net portfolio outflows running at 3m averages of EUR 3bn, 4bn and 4bn respectively, very modest when compared with France'

SocGen, Credit Agri & BNP are all fine.

Sudden Debt's picture

So The euro might make it a few more weeks longuer than predicted?

Stax Edwards's picture

Did u guys ever get a government together over there SD?

Sudden Debt's picture

NAh.... NOT YET!!!  Maybe next month....


You know what they say: If you can't fuck it up in Belgium, you can't fuck it up anywhere!


bank guy in Brussels's picture

Charming funny 1990s hit, 'It's Great to be a Belgian,' or 'The Belgian Song', by the wonderful John Makin, known as 'Mister John', who grew up in the Beatles' town, Liverpool, England, but came to know and love Belgium and live here beginning in the 1970s.

Song is in English, but starts with the Dutch - Flemish word 'potverdekke', which though it looks like it means 'cover the pot', it is something like 'darn it', a polite word substituting for the less polite 'G-dverdomme' 'G-d damn it'.

Here's Mister John Makin singing « Potverdekke, It's Great to Be a Belgian » live at Churchill's café pub here in downtown Brussels on the rue de l'Écuyer - Schildknaapstraat.

Terrific and very funny. Very Belgian, too. Song starts 1:08. Lyrics:

Potverdekke, It's great to be a Belgian
I'm not English I'm not French and I'm not Dutch
I'm not Spanish, Portuguese or German
I'm a Belgian, so thank you very much

As I walk along the street
With my mayonnaise and frites
You can tell I'm as happy as can be

With my Duvel in my hand
Then you must understand
I'm a Belgian, so nothing worries me! ...

Also, here's Mister John Makin singing 'It's Great to Be a Belgian' live at a different downtown café, one in our famous historic ancient baroque square, at Les Brasseurs de la Grand'Place  - De Brouwers van de Grote Markt:

'Mister' John Makin died here in our neighbourhood, a few weeks ago at the age of 61. And, yes, Belgium is indeed just as wonderful a place, as he sang about it.

This video shows how we live here in Brussels, drinking with friends in one of our 1000+ warm welcoming cafés.

"I'm a Belgian, so nothing worries me! ..."

Rest in peace, Mister John.

tim73's picture

"One broad conclusion is that the EUR is probably the worst instrument to express negative EUR area views, with both periphery bonds and equities purer gauges of stress."

Oh really, money printing, drunken sailor buddies UK/USA are safe havens with less than inflation rate yields?!....HA HA HA! New York and London traders are just trying everything in their power to collapse eurozone before blowback from reality into their own hometurds.

1600+ billion dollar budget deficit in US alone, where the hell they are going to find more buyers to this fiscal year alone?! UK also is borrowing every fourth pound now. Then you bitch about Italy's need of mere 50-70 billion euros of new debt...

Eally Ucked's picture

Don't get so upset about US/UK buddies, the article suggest that Euro is in much better position than you think. And probably it is, when they pull out from all investments from $ area (and all those losses). It shows to me they can still do it, but I'm not sure US will be able to withstand it, eurobanks are just deleveraging as fast as possible and when they are ready we will see (after all those loses in eurobanking) who stands on higher ground. I think Americans will be owners of all that shit which need much bigger hair cuts than they think. Allways the first escapee from shit hole is in much better postion than those waiting for miracles.    

JustObserving's picture

US debts and unfunded liabilities grow at $23.6 billion a day. Or, if you prefer, $8.6 trillion a year per  Keep on buying US treasuries.  There is zero risk there.  Safe as houses.

trav7777's picture

at least they are backed by the US Government, as opposed to gold, which is backed by nothing!!!!!!11

Eally Ucked's picture

You see. sometimes I support your views!!!! In American standards we should go after corn or pot backing for currencies! What is US Gov?

SheepDog-One's picture

The Euro will of course be both strong AND weak, flushing out all position takers for more bankster profits. Its just another worthless manipulated fiat after all.

ebworthen's picture

The Euro is being propped.

The central banks are keeping the Euro afloat to punish the shorts while propping the Euro-banks.

If the periphery countries are picked off (as their bond % would suggest) than France and Germany will be left holding the Euro "bag".

Also, a great many U.S. Corporate "dollars" are hiding in Euros, so they have a vested interest in maintaining it; at least until they have a good reason to get out.


kito's picture

i just heard draghi humming gloria gaynor's "i will survive".....

chaartist's picture

exactly. FX market is completely rigged with interventions, pegs of CHF, Yuan, BOJ interventions etc., swaps and the like tricks. Trader can only ride the wawes, there is no common logic of underlying fundament. The problem is, no one know when the party ends and then there will be no time to get out. You can sleep with open positions because you could wake up /maybe near future/ and some sick fuck from business lobby in Switzerland persuade SNB to move the peg to EUR another 1000 pips higher. I play only with capital I can loose and only because I want to live this one in a lifetime story at the market. Maybe I will have the luck to swap it to miners at the end. Everyone without physical is downplaying the risks. 

There will be no trust in any QE that is coming for sure, there will be no trust in IMF. This means that war is so close. The system is so fucked that if we have no debt and run this system, we will be in the same shit in 5 years again. There is no way that this could be reformed with this elite. Ron Paul is a hero, but he would not have the power to change it. He plays with gentleman gestures, they play with heavy machine guns and flexible law. Only currency destruction can bring these powers back to the earth and all the sources of zombie machine world of creative accountancy at the expense of real capital destruction. 


GeneMarchbanks's picture

Exit ship stage right... or left just get the hell off.

flacon's picture

The sight of rats running for cover...

SheepDog-One's picture

Well, theres openings for a lot of GS politicians over in Europe now.

BandGap's picture

Does anyone understand that the model here has become so complex and interwoven that looking at the principle components might not be worthwhile when establishing a predictor model?

I did chemometrics for years, there are instances where small, and well positioned principal components can dominate an environment, or act as a catalyst even when a very they are a small part of the picture.

Currencies, bonds, CDS, equities, etc........when a system is teetering it doesn't take an elephant to bring down the circus tent.





The Axe's picture

Hate to go off topic, but has anyone else been watching the big divergence in the price of Nat.Gas and crude.  Natural Gas is falling all year in price and just hit a 52 week low, yet still a lot of very rich natural gas stocks out there. This is the biggest spread I have seen between wti and ung in forever...?  strange

trav7777's picture

not really...oil is in supply decline and NG is suddenly in supply glut due to fracking

dracos_ghost's picture

I keep thinking that the Euro is being propped up because the Banksters are scared sh*tless that a perceived flight to quality with the dollar might spark a USD short covering rally and blow up the Dollar carry trade and collapse the euro so they are doing everything in their power to keep the euro aloft. Japan would love a carry trade explosion I would imagine though -- would benefit JPY greatly. Black Swan anyone?

The pattern of the repatriation data points peaking before the 2008 crash is eerily showing signs of life again. These guys are dragging around a skeleton at this point not just a dead horse.

SmoothCoolSmoke's picture

Is the Euro = 2x ES trade over?    Hmmmmmmmmmmmm.   Could the trade now be oil = ES?   Seems like it today.

Grand Supercycle's picture

NASDAQ megaphone pattern on daily chart indicates a big move lies ahead.

SP500 monthly chart remains bearish and USDX weekly remains bullish, so it’s only a matter of time until the market makes its move.

razorthin's picture

From a relative over/undersold perspective, you have that backwards.

1000pips's picture

Euro will be 1.40 in a week; who cares any farther out. FX is for huge wave riders, the rest use stops and will lose everything.

spekulatn's picture

Mr Bass interviewed on BBC World.


"...You know how screwed up Europe is when you have a german pope and an italian central banker..."

paulhy's picture

Is this repatriation flow less significant during Asian trading?  Could EURUSD be brought lower in selective sessions outside of the focus of the London and NY markets more effectively?