Capital Flows Barely Cover for Deficit

By: Ashraf Laidi | Tue, Jul 19, 2005
Print Email

The dollar is losing ground across the board despite a 26% increase in net foreign capital flows into the US at $60 billion in May from a revised a $47.8 billion in April. The report was positive for the US in 2 ways; 1) capital flows stood above the $55.3 billion deficit after having coming below it in the prior 2 months; 2) Flows increased over the prior month. But more concerns linger.



Usefulness of the TICS data

There has been much criticism voiced with the timeliness and the volatility of the TICS data. Besides being 2 months old, it has shown much volatility as far as the break down of private and official purchases of US Treasuries. But these claims should also be criticized. The 2-month delay of the TICS data is not more delayed than the trade figures which are also 2-months old, or the GDP figures, which are also at least 2 months old depending on whether we're looking at the advanced or preliminary report.

More importantly, the claim of timeliness can be addressed with the fact that TICS data are effective in conveying emerging trends. Looking at the ratio of capital flows to trade deficit (first chart in the article); one easily notices the falling rate of capital flow coverage of the trade deficit, sliding twice below the 1.0 level and averaging 1.13 times in the first 5 months, compared to 1.35 and 1.43 in 2004 and 2005.

The TICS data also demonstrate the interest in foreign stocks and bonds by US residents, which is increasingly becoming an integral part of the report as US individual investors grow more global and a falling dollar increases the currency appeal of foreign stocks.

Dollar's Look Ahead

The dollar's inability to rally on today's TICS report can be partially explained by the fact that $60 billion was seen as an insufficiently large cushion for the $55.3 billion trade deficit for May--especially when the deficit is expected to pick up in subsequent months due to the rebound in oil prices. Thus, will foreign investors show an equal bounce in purchases of US assets in the months that follow?

The other reason to the dollar's retreat is the 2.1% inflation figure for the Euro zone, which supports the ECB's recent assertions that rising oil prices would exert upside price risks. Although the headline figure was mainly drive by energy prices, the report precludes any chances for an ECB interest rate cut, thereby providing a vital support for the euro.

With the US dollar falling to 3 ½ month lows against the Canadian dollar and the euro well propped of its 1.19 lows, the emerging dynamics suggest more than simply a cooling off in the dollar rally. Fed Chairman Greenspan's testimony to Congress this week is not expected to differ much from the speech he gave in early June. As long as the Chairman sticks to his usual upbeat assessment of the US economy, traders will take this as an affirmation of the status quo, which essentially implies means the need to await further data. Rather, we expect Treasury and currency markets to obtain more hints on the Fed's monetary policy course from the minutes of the June FOMC meeting due this Thursday, as they pertain to the conviction of the Fed's tightening bias.


Ashraf Laidi

Author: Ashraf Laidi

Ashraf Laidi was created in January 1999 and is committed to enhancing public knowledge about the foreign exchange markets. The site offers the latest insights and analysis in currency markets, freely available to traders and researchers alike.

Forexnews.coms unique combination of fundamentals and technicals, along with its pioneering approach to the FX market, gives it the information edge. is the longest-standing on-line source of credible, timely and accurate information in FX world.

Forexnews.coms staff of analysts has gained recognition from highly placed media sources, both inside and outside of the US. Its analysts are regularly cited in Bloomberg TV, Reuters TV, The Wall Street Journal, Barrons, The Financial Times and Investors Business Daily.

Copyright © 2005-2006

All Images, XHTML Renderings, and Source Code Copyright ©