EFTA01459604.pdf

12 January 2016 FX Blueprint: Forever Young Theme #7: CAD dumps ugly krone - buy CAD/NOK We see modest upside in USD/CAD to 1.45 but !Figure 1: Canada's portfolio of assets is dominated by can't get excited. We like buying CAD/NOK which lequities isolates the oil factor and takes a constructive view on Canada's adjustment to the oil shock so far as 20 well its ability to benefit from US growth. Both the Canadian dollar and Norwegian krone are 15 being hit by an oil shock. Norway is likely to cut rates first, however, and does not benefit from economic links with the United States. Expectations regarding o Canadian growth are at almost historical lows while there is still plenty of scope for deterioration in Norway. 05 Monetary easing may come belatedly 00 With the oil and mining sector providing directly or 1990 1993 1996 1999 2002 2005 2008 2011 2014 indirectly up to twenty percent of Canada's economy, a Fated Income Equities lower oil prices will dampen potential growth and exports. Capital spending is dropping as projects are Source bind* elerst Sort erg &woe LA shelved. Oil extraction should continue to decline with oil below the twenty five dollars extraction costs and sixty dollar total costs. This will intensify as oil hedges Figure 2: Canadian wages drop sharply as oil moves roll-off. The resultant drop in production in Canada is below production costs. for now easily matched by rising production abroad. Faced with an intensification of the oil shock, the Bank of Canada expressed some willingness to accept higher imported inflation and potentially the use of non- conventional monetary policy. Inflation remains very sticky with pressure in the production pipeline courtesy of a weak currency. This would delay any Bank of Canada easing while over time US demand should support Canadian exports. Oil below .Mfrs[ion oast t15) 2CO2 2004 '.00e XOS 2010 2:)I2 2314 Theoretically, the Bank of Canada could ease another Cared* 4~ V.Son ilainntart and fifty basis points to drive rates to zero and USDCAD —cream t inn«, wane n perCritge yap year somewhat above 1.47. We find that a one percent move in the two year sovereign rate differential pushes Sane Sore ac wt 2011Manny 'Wry ItOcet USDCAD from 1.40 to 1.51. The model is of average quality and methodology as another key driver is Figure 3: USDCAD rarely exceeds its FEER value for missing by necessity. Oil moves almost in synch with interest rate differentials leading to misleading results long irrespective of the data frequency. 1.50 Portfolio and positioning 1.40 Canadians are long one and half trillion in foreign securities almost half of which is managed by Canada's 1.30 giant pension funds (Figure 1). Eighty percent of Canada's assets are in equities - an amount that is 1.20 declining as they reduce their risks. Foreigners hold a 1.10 slightly larger amount of assets, seventy percent of which is in fixed income. This amount is rising and 1.00 presumably fully hedged against currency movements. 0.90 2005 2007 2009 2011 2013 2015 From a portfolio point of view, the key is therefore the —FEER —BEER ...USDCAD hedging ratio of the pension funds, half of which are in dollars and ten percent in the Eurozone. Based on a Source on te ant Mornay° mere detailed analysis of their balance sheets, the currency hedging ratio is between forty and fifty percent - much higher for fixed income and much lower for equities Deutsche Bank AG/London Page 15 CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0120123 CONFIDENTIAL SDNY_GM_00266307 EFTA01459604