EFTA01379448.pdf

11 December 2017 Special Report: EMFX Outlook 2018: Growth-led Revaluation HUF appreciation in line with fundamentals and shrink, and XCCY converge to zero we expect USD valuation. PI on the other hand, is at the strong end purchases to ease. Just like in the case of the CLP, the of the recent range. However, we believe that tensions PEN's main risk is an unexpected China-born shock. with the EU - the main barrier to PLN appreciation - seem to be softening, opening up more room for 3) The wild cards. MXN, TRY, and Z7\fi appreciation in line with fundamentals and valuation; positioning is also still light in historical terms. Within EM FX there are a handful of currencies that could potentially appreciate or depreciate significantly NCH'. Comfortable with stronger HUF than in the past depending on the resolution of very specific and significant idiosyncratic (and mostly political) risks with potential outcomes that are almost binary in terms of 320.0 1 their FX impact. The three wild cards within EM FX are 3175 • the MXN, TRY, and ZAR. 315.0 - The future of the MXN hinges not on one but 3126 - two sources of political uncertainty that are very 310.0 significant in terms of their potential impact on the 307b MXN and on the Mexican economy as a whole: the 2018 Presidential elections and the future of the NAFTA Xb 0 AM NBA 'comber knot renegotiations. The base case scenario is for 302.3 negotiations to be temporarily suspended sometime • • • Jul Ocl Jan Pa Jul Ocl Jan API Ad at during C11 '18 until Mexico's new government and 2015 2016 20O Congress take over. Also during Q1 '18 we expect the - E0M.* Presidential campaign in Mexico to gather momentum. San 0adscnt Bank lamas& We believe that NAFTA will be ratified and the Presidential election noise will dissipate later in the year, but the MXN is subject to bouts of depreciation (.:1,P The Chilean peso's depreciation on the aftermath of through 1H18. We favour being initially short MXN as the first round of the Presidential election has pushed the we see potential for a significant depreciation of the CLP to level that is an attractive entry point to enter long peso throughout the first half of the year. However as CLP position. There is uncertainty regarding the election's O3 '18 begins, NAFTA renegotiations could resume and second round, but Chile's economy seems poised for the new government might want to reassure markets rebound regardless. We expect frontloaded output growth by tightening fiscal spending. MXN would retrace then. of around 3.5% during 2018 due to base effects related to last years mining strike and improving terms of trade and . Within our sample, the more undervalued currencies a rebound of investments especially into the mining sector. We expect the BCCh to begin a hiking cycle in O3 '18 are also - unsurprisingly- those that rank low in defensive which will marginally increase the CLP's carry. Finally, metrics and happen to be exposed to domestic risks. domestic investors' limited capacity to absorb new debt Among the cheap and 'riskier' currencies, we favour ZAR issued by the government is likely to steepen the CLP longs for several reasons: 1) The rand is one of the curve. Then, we expect the recently achieved cheapest currencies in the world on our fundamental "euroclearability" of local gov't bonds to attract debt valuation metrics (first chart below). 2) We believe there is inflows of yield-seeking foreign investors. The main risk to a significant likelihood of a market-positive outcome at this view is an unexpected slowdown of China and lower the December ANC election, i.e. a victory for Cyril metal prices. Ramaphosa. This would spur a sizable rand rally as market sentiment around South Africa improved; there is also potential for an improvement in business confidence .ils Mining of metals accounts for 12% of Peru's and in the investment climate. 3) South Africa's trade private investment, 60% of exports, and 10% of GDP. balance has flipped from a deep deficit to a record-high The investment cycle in metals is at a turning point surplus, which has helped compress the current account after falling since 2015. Higher copper and zinc prices deficit (second chart below). and the operation at full capacity of mines in Peru suggest new investment flows are on their way: the gov't expects investments of around USD 11.3bn to be However, given the risks around the ANC election, the executed out of Peru's USD 51.1bn investment project February budget and the next Moody's rating backlog in mining. The government's efforts to announcement, we prefer expressing our view via long- minimize social conflicts and regulatory issues pose dated (6m+) limited loss options structures (e.g. 6m upside risks both to investment and current account USD/ZAR digital puts). We expect ZAR appreciation to projections. The BCRP has forcefully prevented the PEN be skewed towards the first part of the year, in the from appreciating but as the economy grows, gaps post-ANC election period. Deutsche Bank Securities Inc. Page 7 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0076926 CONFIDENTIAL SDNY_GM_00223110 EFTA01379448