EFTA01459600.pdf

12 January 2016 FX Blueprint: Forever Young Theme #5: Zar Wars: the return of Yuan solo - buy USD/ZAR The rand was one of the worst performing !Spikes in CVIX and CNH-CNY basis are associated with currencies in 2015. We remain pessimistic for substantial ZAR depreciation vs. all three 'risk off' 2016, as ZAR continues to face major headwinds from external factors (Fed, commodities, China) !currencies (USD, CHF, JPY) and domestic risks (lack of growth, structural 0.7% problems, political uncertainty, current account ea o.6% deficit). Stay long USD/ZAR. r,ie'...s We expect the broad dollar = 0.5% [ zAR— • • uptrend to remain intact this year as the focus turns to 0.4% ts. • the timing of the next hike and the possibility of faster- S . • 0.3% than-expected Fed normalization. This is bad news for • O • z I • it • 40 the rand, which has one of the highest betas in EM to 4) 0.2% 1 • s• : • • JPY crosses dollar strength. Moreover, broad dollar strength, along 9 X01% f 01% •• 410 •St• • *USDcrosses with dwindling demand and persistent oversupply • • I • CHF crosses issues, will continue to drive commodities weakness in 00% the coming year. According to our Commodities -1% 0% 1% 2% 3% 4% research team, the outlook for metals is particularly Betas to CM pessimistic, and we have some way to go before Sow* Oftnen• an LtWoreteg Fared NOM Clar Ste} ttnancy madly "Mu calling a bottom to the cycle. This again is bad news for the rand, given South Africa's reliance on both precious and industrial metals exports. Several reasons on the domestic front to be bearish External imbalances' South Africa's external financing IZAR is among the most exposed in EM: high beta to requirements are high. Sticky and high demand for imported goods keeps the C/A deficit elevated (-4% of !broad dollar strength and to commodities weakness GDP), while the low level of fx reserves (<100% of short-term external debt + C/A deficit) provides little 0.5 MOST &Mud protection against rand depreciation. ZAR is therefore 04 • IllILSN \ particularly exposed to external shocks and tightening •SG0 global liquidity conditions (e.g. through QT or a 03 hawkish Fed). MxN • TRY • • 02 art e—ft, • GDP growth is weak. 01 and DB Economics expects a meager 1% expansion in 2016, with a further scaling back of capital investment 0 • ICRWIT likely. Business and consumer confidence are also at MYR . ••es 1 multi-year lows. There is no respite on the horizon: -0.1 OR -01 43 -0/ 4.1 0 corporate profits are in recession, the business cycle Betas to commode.. BAD crosses) downswing is expected to intensify in 2016, a major Sotere-OrretrOm an newassettos drought is underway and global growth is anemic. Structural roadblock:, These cyclical problems are China is arguably the most critical external risk factor compounded by structural issues which are an for 2016. First, potentially weaker growth in China, and impediment to growth but are difficult to rectify in the growth rebalanced towards consumption rather than near term. Electricity shortages persist, and are commodity-intensive investment, will have a estimated to subtract 1pp from annual growth. particularly bearish impact on the price of metals Unemployment is entrenched above 25% and there is a (China is the major global consumer). Iron ore is of constant threat of large-scale labour strikes. particular concern - China consumes nearly 60% of the world's iron ore, which is a major South African export. •-•, • ,. , is unlikely to provide a backstop to Second, South Africa's direct trade links with China are rand weakness in 2016. The SARB's hands are substantial. Third, ZAR is the most vulnerable currency somewhat tied - it can hike rates to maintain interest to general EM FX volatility and a widening of the CNH- rate differentials with the US and attempt to cap CNY basis that would accompany noise around any currency depreciation; however, it will be hiking into a 'disorderly' yuan depreciation (see chart below). The major domestic economy downswing, which will likely Chinese authorities' recent shift in focus towards a only provide temporary rand support. RMB basket has added further uncertainty, and has increased the prospect of USDCNY upside. Deutsche Bank AG/London Page 11 CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0120119 CONFIDENTIAL SDNY_GM_00266303 EFTA01459600