EFTA01451143.pdf

9 January 2014 FX Blueprint: Thin end of the wedge • Norges bank to continue to balance falling house r prices vs. sticky CPI. Figure 4: Norway. Real Estate Prices, All Residential Buildings, Total & YoY • NOK cheap, but investors wary of jumping back in unless/until Norges Bank and/or crude provide 20 support supportive. 90000 15 In Norway, the mainland economy has been growing 25000 around 2.0-2.5% YoY for most of the last couple of 10 years, with the recent PMI and manufacturing output 20000g suggestive of continuing improvement going forward. 41 5 Norges Bank's focus is balancing the declining housing 150002 market against sticky inflation at the consumer level. o -{ 10000 With house prices having slowed to largely flat on the -5 year, representing a 3-3.5% drop from the peak in Q3 5000 last year, and headline CPI back in line with the Bank's -10 0 2.5% target (from 3.2% YoY in August), Norges Bank is 20'01 2003 2005 2007 2009 2011 2013 20 5 erring on the dovish side, arguing that the rise in (core] inflation is transitory. Indeed, according to the Bank's Sara'Dana* Sink Ns projections, core inflation is expected to drift back up over the next few months, reaching a peak just above !Figure 5: EURINOK and Crude oil the inflation target of 2.6% in April/May, before dropping down and remaining just below 2% up until Ion i 30 the end of 2015. House prices meanwhile, are seen 40 9 5 -1 slowing further, to -2.5% to -3.O% YoY in HI 2014, 500 before returning to positive YoY growth in early 2015. 9D 60S 701 8.5 80 The risk to Norges Banks's finely balanced outlook for g 901 inflation and housing is twofold. First is a scenario in 8.0 100t which past and current FX weakness feeds through to 'tot imported inflation, thus preventing core from 120 moderating in line with Norges forecasts. If the Bank 130 " V then feels compelled to hike rates at a time when JMS J 14 SJMSJ IMSJMS .1 house prices already are declining, that would 2009 2010 2011 2012 2013 exacerbate the decline and not be currency supportive. —Cnaae 04, Brea, Clow USG, mf EURMOK aka Ms An alternative risk scenario is if the house price falls feeds on themselves. With policy rates already as low Sa^11' DIlath* OPearnbleg Anna LI as 1.50%, and with core CPI projected at or above target over the next 3.6 months, there would be limited scope for policy to provide a stopgap. While the above scenarios are not our baseline, they will continue to be Figure 6: Core inflation - actual and Norges Bank's a key factor in the Norges Bank's decision-making projection process, with monetary policy likely to be stuck 15 between a fear of adding to the decline in house prices on one hand and sticky inflation on the other. 3.0 Meanwhile crude is likely to continue to flatline in the 2.5 relatively tight $90 to $110 range of the past few years. 20 Monetary policy and crude are therefore unlikely to 15 provide much in terms of direction in the NOK. However, given recent depreciation cannot be 10 explained by fundamentals, with the Norwegian unit 0.5 arguably oversold even when taking into account the JMSJMSJIASJMSJIASJMSJM 21109 2009 2010 2011 2012 2013 2014 market's now very dovish outlook for Norges Bank policy and flat oil prices, we are cautiously constructive. —CPI-ATE (achugeo for taxes and excktarkg energy). YOY On balance we anticipate very gradual downside in — NOME* Bank's exaeceon EUR/NOK from current levels. A 3m EUR/NOK put @ 8.25 costs an indicative 76bp. Alternatively, finance it Saes Daum. Sant Scents. Fenno IP by selling a 3m EUR/NOK 8.65 call. fieruik Gullbefg. London. +44 (0120 7545 1.947 Deutsche Bank AG/London Page 13 CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0 107386 CONFIDENTIAL SDNY_GM_00253570 EFTA01451143