International Flows Fail to Cover US Deficit by Ashraf Laidi 12/15/2004, Forexnews.com

Capital flows into the US tumbled 29% to a 12-month low of $48.1 billion in October after a revised $67.5 billion in September. This was the 7th monthly decline in net flows into the US out of the 10 months of data on hand. MORE IMPORTANTLY, the $48.4 billion in flows FELL BELOW THE TRADE DEFICIT OF $55 billion for the same month, an ominous sign of the US’ inability to finance the swelling deficit.

· Underlining the unreliability of private purchases (hot money from hedge funds), these flows fell 48% to $3 billion in October, leaving central bank purchases to assume 81% of total net foreign purchases of US treasuries, certainly an ominous sign of sector concentration of buyers.

· Despite the return of foreign purchases of US stocks to the green after 2 straight months of net selling, there is a deteriorating trend of waning foreign interest in US stocks as highlighted by the fact that foreign holdings of US equities make up 0.42% of total holdings in Jan-Oct, compared to 42% for Treasuries, 32% for corporate bonds and 35% for Agencies. This contrasts to holdings of as much as 38% in equities in 2000. (See chart below).

POSITIVES

· Net purchases of US treasuries rose 15% to $18.3 billion, while net flows into US Agencies jumped 171% to a 6-month high of $22 billion, following the September drop which was caused by rising concerns with Fannie Mae’s financial accounts.
· Also on a positive note, net foreign purchases of US stocks stood at $3.2 billion, after 2 consecutive monthly readings in the red at $1.1 billion and $3.1 billion in August and September respectively.

· Foreign central banks’ purchases of US treasuries rose 51% to $14.8 billion in October; relieving worries of fading central bank interest after the September figure fell 37%.



UK Steps up Treasury Buying, While Japan Reduces it

A closer look at the foreign holding of US treasuries is necessary because the 15% increase in October holdings overshadows the fact that Japanese holdings of US treasuries registered their second monthly decrease, a move not seen since October 2002. Another source of concern is the negligible 0.2% increase in Chinese holdings of US treasuries at $175 billion, which was the lowest monthly rise since February.

Most importantly, treasury holdings by OPEC rose 8.3% to $46.9 billion, posting their highest increase since December 2002, reflecting increase in oil receipts after oil prices hit record highs that month. It’s worth noting that this does not reflect OPEC’s move into euro-denominated holdings, which rose to 20% from 12% three years ago, at the expense of falling US holdings to 61.5% from 75% over the same period.

Another notable increase was the 4.6% rise in UK holdings of treasuries to $140.9 billion was also instrumental in the increase. Since official purchases of US treasuries accounted for 81% of the total, we can assume that Bank of England might have upped its purchases of dollar securities as a way to temper sterling’s appreciation.

In conclusion, the above chart clearly defines the overall situation, namely the falling rate at which net monthly foreign inflows have been financing the swelling trade deficit. The chart shows that foreign inflows covered 0.87 times the trade deficit, down from as much as 2.0 times in January, making this lowest rate of coverage since October of 2003. The chart illustrates the decline is no aberration but a gradually deteriorating trend in the financing of the US trade gap.