EFTA01461070.pdf

Deutsche Bank Markets Research Global Spot Foreign Exchange Special Report Dale FX 9 March 2015 Last year we introduced the Euroglut concept: the idea that the Euro-area's huge current account surplus reflects a very large pool of excess savings that will have a major impact on global asset prices for the rest of this decade. Combined with ECB quantitative easing and negative rates we argued that this surplus of savings would lead to large-scale capital flight from Europe causing a collapse in the euro and exceptionally depressed global bond yields. With European portfolio outflows currently running at record highs, this piece now asks: Can outflows continue? How big will they be? The answer to this question is critical: the greater the European outflows, the more the euro can weaken and the lower global bond yields can stay. We answer the outflows question by modelling the Euro-area's net international investment position (N12). We argue that Europeans now have to become net creditors to the rest of the world and that the NIIP needs to rise from -10% of GDP to at least 30%. As such, we estimate that Euroglut requires net European capital outflows of at least 4 trillion euros. This conclusion leads to three investment implications. First, we continue to expect broad-based euro weakness. European outflows have been even bigger than our initial (high) expectations, so we are revising our EUR/USD forecasts lower. We now foresee a move down to 1.00 by the end of the year, 90 cents by 2016 and a new cycle low of 85 cents by 2017. Second, we expect continued European inflows into foreign assets, particularly fixed income. Our earlier work demonstrated that the primary destination ofEuropean outflows will be core fixed income markets in the rest of the world, and evidence over the last few months supports these trends: most European outflows are going to the US, UK and Canada. These flows should keep global yield curves low and flat. Finally, we see Euroglut as continuing to constrain monetary policy across the European continent for the foreseeable future. Since our paper in September central banks in Switzerland, Norway, Sweden, Denmark, the Czech Republic and Poland have all eased. These countries run large current account surpluses. Through a unique mix of huge excess savings and structurally low yields, the entire European continent will continue to be a major source of global imbalances for the rest of this decade. fhttp://pull.db-gmresearch.com/p/909-5609/68285477/DB SpecialReport 2015-03- 10 0900b8c08960dcc9 pd CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0122888 CONFIDENTIAL SONY GM_00289072 EFTA01461070