EFTA01459605.pdf

12 January 2016 FX Blueprint: Forever Young nj Until such point as oil prices start to rebound, pension Figure 4: CADNOK should follow the US hiking cycle funds have little incentive to change their hedging higher ratios. When they eventually do shift their policy, the positive impact on the CAD should be considerable. 130 1 —USO Broad TWI 7 Val 125 -CADNOK. rhs 6.8 As the Canadian dollar is driven lower by falling oil 120 6.6 prices, its external and internal position deteriorated. Demand for external goods remains sticky while oil 6.4 115 exports collapse driving fair value lower. Over time, a 6.2 weak CAD should help Canada export more non-energy 110 • products to the US helping the FEER to improve with a 6 105 lag. USD/CAD has rarely exceeded its FEER fair value 5.8 for long suggesting that ex ante a greater collapse in oil 100 prices, it is already at stretched levels. 5.6 95 5.4 Buy CADNOK 90 5.2 One way to express a moderately constructive view on Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-16 Jan-16 CAD is via CADNOK. The cross has historically tracked Source Oeureiweiont eloonte. AnneLP the broad USD index closely, which suggests it is cheap (Figure 4). Given the more diversified nature of the Canadian economy, and its close ties to the US Figure 5: CAD may be more poised to benefit from a cycle, there is much more potential for policy to remain bounce-back in oil than Norway on hold in Canada than in Norway, where the Norges is likely to cut at least once in the first half of this year. 100 Finally, the lower oil breakeven rate in Norway (at 38 Iona-tern oil breakevem, USD big 90 versus 49 for Canada tar sands) should mean that SO further falls in oil or stable prices hurt the NOK more on 70 a marginal basis. ao ba as Sell USDCAD 1.50 strike 93 There is only a 5% probability of USD/CAD exceeding 1.50 based on the past history of monetary divergence between the US and Canada (Figure 6). Using the past history of the two year sovereign rate divergence and a 20 10 0 11111.11.11.11.111 .1 [ valuation model we can calculate this probability. The parameters as always will prove unstable in line with 1.1.111WHILI. 8 h the Lucas critique of Keynesian econometric models. S 3 This is in addition to model error with CAD somewhat 3 of a dicey currency to work with. Option prices attach Sant DRAW* 0" eiocnnerre Pone LP by definition a higher risk neutral probability to crossing the rubicon of 1.50. Figure 6: Probability of USDCAD exceeding 1.50 The risk is that getting the 1.50 level wrong could prove exceedingly expensive. Tail events are brutal and € history shows 1.60 as the top level. 25% I i 20% Sehastien Gay, New York, 4-1 (212)250 0951 1 n% I i 10% 1 5% I 0%1.45 LSO 1.55 USD/CAD on p lint est rate rnovements —based on ustlead option ;me Scan. Daurtuonllant Page 16 Deutsche Bank AG/London CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0120124 CONFIDENTIAL SDNY_GM_00266308 EFTA01459605