EFTA01449353.pdf

16 May 2013 FX Blueprint: Dashing Buck Theme #9: Mexican Siesta • With the reduction of global tail risks, EMFX is still from the combination of excess global liquidity amid a attractive as a carry proposition due to elevated weakening global environment, in which it is becoming interest rate differentials and reduced volatility. increasingly difficult to find a good story on fundamentals like Mexico's engaging in long-due • However, differentiation could play a more structural reforms. An anticipated credit upgrade (by prominent role as fundamental deterioration Fitch) and political signals for the continuation of the gradually spreads from the core to the periphery. reform agenda pushed the MXN to break the critical 12 a In some cases, government intervention will level in the last few days. Even though the structural continue to have an important influence on short- backdrop is sound, we believe that the short-term term FX movements. upside potential of the MXN is now limited. The gradual materialization of the reform agenda and the • We still recommend short EUR/BRL and short inevitable recovery in the US will certainly provide EUR/CLP as carry trades. While we remain some medium-term support for the currency. In the constructive on MXN in the medium term we short run, however, heavy positioning and potential recommend tactically taking profits. transitory increase in risk aversion could induce a The noticeable reduction of Eurozone tail risks has temporary break in the appreciation trend. helped EM currencies to become less sensitive to EUR/USD movements. With still relatively better growth Figure 1: Latitm and Asia FX on overvaluation territory perspectives, and in many cases, elevated interest rate differentials, EM currencies maintain some residual ggr Millilfremeni from fair Value allure in this environment of reduced volatility. 35% Nevertheless, as the deterioration of fundamentals 30% slowly spreads from the core to the periphery, 25% differentiation begins to play a more prominent role. 20% Despite some overvaluation and, in some cases, 15% deterioration in external accounts, capital inflows on 10% the back of persistent monetary accommodation at the 05% core should help to avoid any important correction, at 00% least in the near term. Aggressive FX intervention could 06% •Mar-13 ■Janl3 ■Jul-12 .10% be problematic when central banks are more worried .15% about losing competitiveness amid sputtering EMEA Asia LatAm economic growth than the potential inflationary effects of weaker currencies. Sant Daaelm Bio‘t The BRL is a clear example of a central bank stepping in front of weakening fundamentals. In our view, the 'Figure 2: Still elevated interest rate differentials BRL will remain range bound due to official intervention, offering an attractive carry/volatility combination. The lukewarm interest rate hiking cycle, when inflation dynamics are all but comfortable, indirectly imposes greater constraints on acceptable FX depreciation. Even though the FX pass-through is relatively low in Brazil, and fundamental drivers are pointing toward further depreciation, the central bank has already signaled that it does not want to face any risks on the inflation front by promptly intervening when it considers necessary. We thus continue recommending short EUR/BRL to maintain a long BRL exposure as a carry trade (current: 2.60, entry: 2.56, BRL CLP COP MN PEN ?AR HUF LS PLN RUE TRY target: 2.45, stop: 2.64). —. Doursthe aan. In contrast, MXN is an example of positive differentiation. Mexican assets continued to benefit Deutscho Bank AG/London Page 17 CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0 104724 CONFIDENTIAL SDNY_GM_00250908 EFTA01449353