EFTA01449351.pdf

16 May 2013 FX Blueprint: Dashing Buck Theme #8: EMEA Reality Check There are a number of sub-plots and potential themes Figure 1: Dramatic differences wit the 'growth gap' in currently in EMEA FX, but rather than impacting EMEA. (relative to pre-crisis trend) significantly on price action, they seem to have led to paralysis, with correlation patterns versus traditional drivers having converged to near zero in many cases. That is unlikely to last and over the next couple of months we are likely to see a mix of global themes and country-specific factors having much more of a significant impact on price action. In EMEA, the impact of the external backdrop is potentially very mixed. The subdued external inflation environment means that economies with large negative output gaps will be less sensitive to currency weakness, and more inclined to continue to push through rate cuts, if not regardless of FX, at least as long as FX Turkey — Rune —Poland — Czech Republic depreciation is orderly. Hungary's NBH have made it — South Africa — ismer —Hungary very clear that the focus is on growth, and that inflation Sotto, Owitielte AIM is taking the back-seat for now. Consequently, the NBH rate cutting cycle continues unabated, with the Bank 1 now having reduced the base rate down to an all-time Figure 2: SA ClA deterioration to lead ZAR even lower? low of 4.75% from 7.00%. The poor domestic backdrop, the need for further fiscal austerity in order to secure 0 5.5 EDP exit and headline CPI at a record lows suggest rate 6.0 reductions will continue, with the rates market g -50000 6.52 currently pricing in around 100-125bps of further 7.0 easing. Indeed, weak data, the non-domestic PPI t -100000 7.5.1 Bog running at a mere 3.2% YoY, coupled with global 9.5rai disinflation and relative currency strength also lower g -150000 9.0 the bar for 50bp rate cuts (during all NBH easing cycles 9.5 c)-200000 - since the turn of the century the bank has at some 10018 point reduced rates by more than 25bps) and/or a more 10 5 -250000 11.0 prolonged easing cycle. 2006 2008 2010 2012 Elsewhere, South Africa's SARB seems to be warming — uSazAR. flit South Africa C/A. Mt to the idea of rate cuts despite a relatively weak ZAR. Governor Marcus recently emphasized the importance Saone Dane. &St of a free-floating exchange rate as a shock-absorber, and argued that a weaker currency would be crucial in Figure 3: Persistent Czech disinflationideflation dealing with the country's large trade and C/A deficits. She also pointed out that medium-term inflation expectations remain well anchored. These comments POOCIPOW4VARII Ori bolas tilt, 5 la CPI •Olennoe Mange definitely appear more dovish than before, particularly with regard to the exchange rate and would suggest 3 the Bank is ready/willing to accept a weaker currency 2 as long as the sell-off does not become disorderly. The Czech National Bank (CNB), meanwhile, falls into the category of central banks not just willing to accept 01,4.00 of enemy. an wIlioron hes been aantrachng YoY twee eeneearvac wontini but which would welcome currency weakness, in order to counter persistent disinflation. Indeed, Governor 2007 2008 2009 2010 2011 2012 Singer recently reiterated his view that interest rates — monetaryReacy ReiliV•Inntled. will stay near zero for a "very, very long" time, and •••• /Amsted InlUson action-rig Fuels San* Deursthe aH Deutsche Bank AG/London Page 15 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0 104722 CONFIDENTIAL SDNY_GM_00250906 EFTA01449351