FXStreet (Delhi) – Research Team at Nomura, suggests that EUR/USD weakness since mid-2014 can be explained by monetary policy divergence, but international flows have also become more EUR negative. Key Quotes “In fact, the basic balance is now moving from net inflows to neutral or even net outflows. From this perspective, EUR weakness since mid-2014 can be explained by: 1) the acceleration of fixed income outflows from the euro area, 2) the slowdown in foreign investment in euro area equity investment since Q2 2015, and 3) M&A outflows from the euro area into the US. Although the current account surplus widened, increased capital outflows offset the increase in the surplus. We expect fixed income outflows to remain strong in the euro area this year, while the current account surplus is unlikely to improve further. Mid-term EUR flows are likely to remain weaker than previous years, putting downward pressure on EUR in 2016. (Fixed income flows) We believe the acceleration in fixed income outflows has been the key flow cause of EUR weakness. Foreign investors likely turned net sellers of euro area bonds in 2015 for the first time since the introduction of EUR. In contrast, euro area investors’ foreign bond investment has been at historical highs. Negativity in the euro area bond market is now more prevalent, which should discourage central banks from recovering their share of the EUR. The Japanese strong preference for USD assets also points to limited support for the EUR. The expectation of further ECB easing (to address disinflation concerns) under healthy domestic economic momentum will keep foreign bond investment momentum strong. Fixed income outflows from the euro area are likely to remain high. (Equity flows) The euro area economy’s cyclical position (expansion) is likely to attract foreign equity investors’ interest this year. However, the share of euro area equity in US investors’ total foreign equity portfolios has recovered to above 23%, the highest since 2008. Expectations for additional ECB easing could boost foreign inflows into the euro area equity market again, but the FX hedge ratio of foreign investment in the euro area is likely to be high, if investment is motivated by ECB easing expectations. (FDI and current account) Foreign direct investment flows also recorded net outflows from the euro area in 2015. Our M&A flow tracking suggests outflows from the euro area have continued. Our economics research team expects the euro area current account surplus to be maintained in 2016-17, but the surplus is unlikely to increase further this year, as the expected growth differential between the euro area’s major export destinations and the euro area is likely to remain smaller in 2016 than in 2012-14.” For more information, read our latest forex news.