EFTA01451178.pdf

9 January 2014 FX Blueprint: Thin end of the wedge Theme #1 0. Pesos no prickly pair • Cyclical Lat Am FX offers value in an environment IA better starting point for valuations of strong US/global growth. • Stay long MXN vs. USD, COP and RUB on back of FIN inflow pre-pricing and oil production prospects. Long CLP/COP should benefit from terms of trade and political uncertainty in the latter. Stay cautious on BRL because of structural concerns, weak fundamentals and less BCB intervention appetite. After 2013's annus horibills, we anticipate Let Am FX to offer more value over the coming months. The reaction to December's Fed tapering decision suggests markets have fully incorporated expectations of higher long-end US yields. Going forward, we expect currency performance to be closer to fundamentals and less sensitive to the re-pricing in US rates. That said, sane DOOKIM OW. successful forward guidance, at least in the short term, is a necessary condition for Lat Am performance in 2014. Growth surprises in the US should then in CLP to benefit most from global growth bounce principle benefit currencies with strong export exposures that have already seen considerable 73% •Gicbal Di correlations to yoy GDP 1 iMa adjustment. From this point of view, CLP, PEN and Caw I CI MXN have the highest betas to the global cycle with !Oh .6itc41:It % 0CC I I I I l't the latter particularly well placed to benefit from an ow, iI I I I I upturn in the US economy. s.vi, 1 iIikg I I itat Despite more favorable valuations and possible upturn t I --: in some of the local economies, structural concerns A. iii: . , I I , and balance of payments dynamics remain headwinds f— i i ll i l. for the region as whole. Where export-orientated I 1 growth is more elusive, such as in the more closed I I I I LI economies of Brazil and Colombia, domestic demand L may not be sufficient to provide attractive rates of ID% • return for foreign investment against a backdrop of US rate normalization. At the same time, export growth will Sown Durso.. flank be insufficient to close current account deficits. Renewed falls in commodity prices also present a risk Mexico should begin to close FDI gap for COP, PEN and CLP, although our base case is that better China growth will provide a boost for the latter. 040 —Average Lem Amenca. cur ulatne FDI inflows Mexico. cumulative FDI inflows Turning to individual currencies, we remain bullish on 036 the Mexican peso. First, the energy reform passed in December is more ambitious than expected. Licenses 030 and production sharing contracts, rather than the originally proposed profit sharing regime, increase the 025 -• potential for FDI inflows. While we do not expect the 020 •• first inflows until 2015. academic research into M&A flows and the relationship between exchange rates and 015 • commodity prices suggest that FX markets may 'pre- price' expected capital flows meaning that continued 010 • momentum over secondary legislation will be more 006 • important than deal announcements per se. It is worth noting that Mexico has foregone the bonanza in FDI. • Jan-03 Apt-Os Jut 1',5 Oct-06 Jr-to Apr.09 j ul.10 o‘t. I San anent* Park Sto.r.twg nIY See. for example. OB Comm:tames C1u.snemr, Trading industrial rnera's ratios in a rising USD envvonment kis° Fu. Judie 2013 Deutsche Bank AG/London Pago 19 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0 107457 CONFIDENTIAL SDNY_GM_00253641 EFTA01451178