EFTA01362012.pdf

4 September 2015 US Fixed Income Weekly RAAB vs. ratio of Fed to PBOC balance sheet 1.7 6.9 • 6.8 1.6 6.7 1.5 6.6 1.4 63 1.3 6.4 ratio of .n ,.., 6.3 1 '2 sheets - 6.2 1.1 -,—iiimilimgrgi \- 6.1 1 . . , • , . , , , , .. 1 , . . , . , . . T , , • , 1--- 6.0 20084 20114 20144 Sage.. decentgeg Dances Dant The table below highlights these three periods in terms of the actual notional impact on global liquidity via the combined effects of revaluing the PBOC balance sheet as well as the changes in the underlying domestic liquidity. Under a relatively stable currency the PBOC expanded its balance sheet aggressively in the first phase, presumably in part being obliged to accelerated FX reserve accumulation; the Fed was more or less in between expanding their balance sheet. The second phase saw the more dramatic currency appreciation with a strong Fed expansion but also strong PBOC liquidity expansion. The third phase saw even stronger Fed balance sheet expansion but weaker PBOC expansion and more modest RMB appreciation. The last two phases combined saw global central bank liquidity expand by notionally similar amounts i.e. $1500 billion. More than double the first phase when the currency was more stable and the Fed was quieter. However note that as expected, the reserve accumulation was almost the same in each period, around 500-600+ billion. So even though the Fed wasn't expanding the balance sheet much, the hangover of the previous expansion and capital flows in general required a more aggressive intervention by PBOC to acquire reserves and maintain the a stable currency. So a notionally less aggressive expansion in global central bank liquidity under a stable exchange rate regime was disproportionately more skewed to reserve accumulation. 'Changes in central bank bet€once sheet liquidity HI fed OS chi tar Ch OS OAS dune 11.31 SAS %tag RPM USOchanie Total arsons dig S On in start finish es in 201042.2C0694 41'% 92 173% 1.1.9s 684 682 021% 532 622 SOB 101241.201083 254A Sal 142% ISIS 6.77 6.31 7.26% 327 1401 657 201'04-20120 333% 1126 7T6 11M 6,24 6.09 251% 491 1613 $10 Sane Mayer MOWs anY Dealer, Gal The next issue is given changes to liquidity how does it impact asset prices. We can think of the three components of liquidity: the Fed's balance sheet, the accumulation of FX reserves by other central banks; and the residual of other central banks' liquidity expansion after the accumulation of FX reserves. As the chart below shows in terms of growth the explosion of the Fed stands out during the crisis but there have been strong expansions in other central banks' liquidity excluding reserve increases. FX reserve accumulation has been quite weak since 2012 and is now negative. In absolute terms liquidity is strongest in FX reserves and other central banks ex reserves by a factor of three times for the Fed's balance sheet. Page 8 Deutsche Bank Securities Inc. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0051309 CONFIDENTIAL SDNY_GM_00197493 EFTA01362012