EFTA01446664.pdf

9 January 2014 FX Blueprint: Thin end of the wedge differently. Our view that USD strength will broaden Ilnflation trajectory to guide USD/CNY fixings out to GI0 low-yielders like EUR, and continue to gain ground against the JPY is thus an important tailwind 120%, %y0 10 for USD/SGD. SGD is also one of the most overvalued %Yet currencies globally, with consensus across a broad 100% a range of models. Moreover, domestic vulnerabilities DBX 00% forecast r, 6 have built up in Singapore over the OE years from high household debt to bubbly property prices that leave her 00% exposed to inevitable short-end rates normalization. 4 0% We are long USD/SGD looking for a move above 1.30 2 this year. 2 0% o.ax 0 appiec uiturn ;13i,1,.. It, play .2 0% We expect RMB appreciation to persist in 2014 despite 2007 2036 2009 2010 2011 2012 2013 2014 2015 a strong USD environment. With global growth topeecenon vs USD tP8oC 'songs) Clime CPI IRKS) gradually recovering and Asian exports likely to catch up, we look for a healthy current account surplus for San* OMNI* at. etc China ($220bn, 2.2% GDP). In addition, expectations of further increases in offshore investment quotas (i.e. RQFII) on the back of capital account liberalization, Positioning is short USD/CNY and likely more in CNH should mean that portfolio inflows pick up, putting further appreciation pressure on RMB. With the 1.0 Long USEICNY appreciation trend intact, and carry potentially set to 0.6 become more attractive as authorities push forward 0.0 1-- with interest rate liberalization; we are likely to see speculative flows into China persist. Inflation will be a -0.5 key driver of the pace at which this appreciation is -1.0 permitted by the authorities. The main risk to our view -1.5 is from the sizeable nature of short USD positioning in this pair - both in the offshore and onshore markets. In -2.0 the event of weaker economic data driven by tight -2.5 monetary conditions and reforms, we could see a Shot USBCHY 1 pickup in volatility. For now though, we stay short 12M -3.0 Jan-10 Jan-11 Jan-12 Jan-13 Jan-1. USD/CNH with a target of 5.95. USD/CNYposinoning JPY/KRW heading back to single-digits San (Mundy ant Itruktes pol The won's fate in 2014 remains a struggle between strong underlying fundamentals, and the defensiveness Korean shipping and construction orders remain strong of the central bank in the face of concerns about a weakening yen. The fundamental story is supported by 12" •Shipbolcing mites 1) continuing improvement in the current account; 2) uscem ElavelS00S construction orders high leverage to the global growth/trade upturn; and 3) strength of the domestic financial system as a result of 100.0 a the macro prudential policies implemented post-2008. Given the strength in export orders in construction and 800 1 shipping and the resulting hedging pressure, as well as the record levels of USD deposits held by Korean co° I corporates, there is likely to be persistent pressure on the currency to appreciate. BoK on the other hand is 4°1) 1 unlikely to abandon its conservative stance on the won, given concerns about upside to exports being competed away by a cheapening yen. We have seen 11 11 ,' I 1 1 1 1111 21 12 such concerns drive the policy response function in 1997 2000 2003 2006 2000 2009. in mid-2012 and again last year. Given the expected strength in the broader dollar, and the Bors Sane 0—• Sant CSC reaction function, we see better risk reward to express the view of fundamental strength in KRW via JPY/KRW downside. We target a clean break of the psychological Sochdova, Singapore. +65 6423 8947 10 level, with a near-term target of 9.75. Petty kojedjoio Hong Kong, +852 2203 6153 Page 16 Doutscho Bank AG/London CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0 100965 CONFIDENTIAL SDNY_GM_00247149 EFTA01446664