EFTA01459700.pdf

12 January 2016 FX Blueprint: Forever Young China as well as oil-producing nations likely remain Only Australian short-end rates priced to decline large suppliers of Australian fixed income. Weighty 96 private investors such as Japan's GPIF tend to be more price-sensitive than reserve managers traditionally 0.60 1Y1YIRS-1YIRS 0.93 diversifying into AUD, and their demand may be 0.40 peaking along with the rate differential (figure 4). 0.30 020 Unlike Australia, New Zealand retains a small trade 0.10 surplus, but it pays foreigners 4% of its GDP in • investment income, almost four times more than it could attract in FDI inflows over the past year. Portfolio o to -020 flows are insufficient to fill the gap. While New 0.30 Zealand's basic balance has long been in deficit, some .0 40 FX demand previously came from reinsurance USD GBP SEK NZD CAD CHF EUR JPY AUD settlements. Yet these payments, formerly hidden in the 'net errors and omissions', have now been settled. Sam :MON •Sink Illixatbn The errors and omissions in the BoP statistics remain enormous, not least due to (Chinese) property inflows. 5: Antipodes still relatively expensive and nowhere While anecdotally these inflows continue, current near historically extreme PPP overshoot levels Chinese policy regarding capital outflows makes it unlikely for now that inflows would accelerate. Hence, Most Cheapest stssenstvo FON as New Zealand lives above its means, it increasingly PLI accumulates financial liabilities that come with no 06 — BEER tangible, FX-relevant inflows. CAD — FEER W( More Ptifr EUR arAnsise Positioning and valuations favourable as well PPP TRY Despite some downside skew in the options market, rvi IL4xN positioning is more favourable for shorts in both AUD CHF CLP and NZD than in a long time. Kiwi positioning is 9SD JP, marginally long on the IMM. And while some core AUD AUD TLvD shorts have proved resilient, the trade is far less 71 its %or crowded than in the second half of last year. Moreover, ampodes still 7 r despite significant depreciation in the past year both saw* - expensive Antipodes remain expensive on our BEER and PPP Scum Damsestifink iftentesep arose* LP models relative to most of the FX universe. Both are close to PPP and have a long way to go before reaching overshoot levels observed in the past. 6: RMB depreciation means that NZD/USD needs to weaken a lot for NZD TWI to fall to RBNZ forecasts Domestic risks skewed to the downside We see little upside risk to the currencies from the 0.67 ft2D/USD rates markets, which price no full cut from either 0.66 Current spot levels (NZD 1W = 73) Reserve Bank in 2016. While our economists also see 0.66 —NZD TW1= 69.40 4RBNZ O1 both Banks on hold in the coming months, risks are 0.64 forecast) skewed to the dovish side. The RBNZ in particular may N2D = 67.70 IRBN2 O4 0.63 soon opt for jawboning in light of the strong TWI forecast) 0.62 . jeopardizing their inflation forecasts. Depreciation in NZD/USD needs to be very large indeed if the higher- 0.61 weighted CNY depreciates at the same time. The TWI 0.60 - 1Y relationship: falling to the RBNZ's end-2016 forecast Of 67.7 and 0.58 NZD/USD = (NZD 1W + 2.92 - CNY rising to 7 implies 0.59/USD, all else constant. The 0.58 3.22•USD/CNY1/81.26 end-Q1 forecast implies 0.62/USD if CNY rises to 6.80. R7 =90% uSD/CNY 0.57 - 6.3 6.4 6.5 6.6 6.7 6.8 6.9 7 7.1 7.2 7.3 The RBA seems more content with the exchange rate, Amos Amsess Sistestros Swwe LP and last year's fall in the unemployment rate may permit some more 'chilling out'. Yet Australia's stunning run of data surprises in Q4 should soon mean- Robin Winkler, London, +44 (0)20 754 71841 revert. Even if employment data continued to beat forecasts, the market will increasingly discount deviations from alternative indicators, which look solid rather than stellar. Page 10 Deutsche Bank AG/London CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0120330 CONFIDENTIAL SDNY_GM_00266514 EFTA01459700