MacroScope

Firefighting in the euro zone

Money markets largely braved Cyprus’s bailout saga last week, but figures showing liquidity conditions are tightening suggest sentiment may not be as resilient the next time around.

Data from CrossBorder Capital, an independent financial firm that specialises in analysing global liquidity flows, shows the euro zone saw its biggest capital outflow in March since late 2011 – around the time the ECB injected liquidity into the financial system.

Financial institutions and governments took a net $175 billion worth of bonds and stocks, on an annualised basis, out of the euro zone in March – the biggest outflow since $201.4 billion in December 2011, according to the data.

Capital has been flowing out of the bloc since July 2011, the data showed.

Michael J Howell, CrossBorder Capital’s managing director, said:

Liquidity conditions are deteriorating fast and that’s backed up by the fact that if you look at net financial flows into the euro zone they are basically trending lower. The Cyprus situation clearly hasn’t helped.

He said the trend, along with a reduction in the size of the ECB’s balance sheet as banks repaid ECB crisis loans, was reducing the amount of liquidity in the financial system.

Has the Brazilian FX market lost its swing?

Tiago Pariz in Brasilia also contributed to this post.

Brazil’s Trade Minister Fernando Pimentel was the latest authority this week to fire warning shots in a resurging currency war. The government is “focused” on keeping the real at its current level of 2 per U.S. dollar, he told journalists after a meeting with fellow ministers and businessmen.

Using market rules, we are going to try to keep (foreign exchange) rates steady every time the currency is under attack.

These words came days after Finance Minister Guido Mantega admitted Brazil now has a “dirty-floating” regime. “We cannot continue watching as others take ownership of our market and bring down our industry,” he told a local newspaper.

Safe-haven Canada

The European crisis has thinned the ranks of countries considered safe-havens for investors, and may be contributing to an increase in foreign ownership of Canadian assets. Canada, whose comparatively robust banking sector helped it weather the 2008-2009 financial crisis better than many peers, saw capital inflows in July that helped reverse a June decline, according to the latest figures.

Foreigners resumed their net purchases of Canadian securities in July, taking on C$6.67 billion ($6.88 billion) after having reduced their holdings by C$7.76 billion in June, Statistics Canada said on Monday. Canadian authorities have said foreign investors view Canada as a safe haven. So far this year foreigners have made C$41.23 billion in net purchases, a substantial amount though down from C$54.31 billion seen in the first seven months of 2011.

According to Charles St-Arnaud, economist at Nomura, stocks saw their biggest inflow since February 2011:

Foreign investors still buying American

Overseas investors have yet to sour towards U.S. assets despite high government debt levels, according the latest figures on capital flows.

Including short-dated assets such as bills, foreigners snapped up $107.7 billion in U.S. securities in February, following a downwardly revised $3.1 billion inflow for January. At the same time, the United States attracted a net long-term capital inflow of just $10.1 billion in February after drawing an upwardly revised $102.4 billion in the first month of 2012.

The data showed China boosted purchases of U.S. government debt for a second month in February, but also some waning of demand for longer-dated securities.