EFTA01449343.pdf

16 May 2013 FX Blueprint: Dashing Buck Theme 41: Green Back The dollar is the top performing currency in G10 so far this year, and not far from the top if emerging market currencies are included. Therefore, dollar strength has not been confined to just the yen (see first chart), FedUSDINNI which suggests a broader dollar uptrend is unfolding. The fact that the consensus of analysts is only looking 77 USD basket vs G10 eivJPY(equatweightec0 for moderate dollar strength against the majors and weakness against the rest of GIO and EM add to the 75 case that we are only at the early stages of dollar 73 strength. 71 - Equity Flows Still Not Supportive 69 - Ironically, dollar strength has so far not been supported by foreign inflows into US equity markets, despite US 67 - outperformance. The US saw negligible equity inflows 65 - l --r in QI, with the Euro-area seeing by far the largest. Both Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Japan, and the rest of Asia also saw larger inflows (see second chart). Flows often lag performance, so one Sans oar.a.. would not necessarily expect flows to immediately pick -...-....-....-....-....-....-....-....-...-....-...-....-...- up into the US with stronger US markets, but the Figure 2: Equity Flows To Everywhere But US resilience of the dollar does augur well for a dollar uptrend. so $ba, estimatedforal forEuro-oreo Euro 70 China Wildcard so Yet the equity flow picture has not been the most 60 Japan surprising flow story of 2013. Instead, the significant increase in Chinese FX reserves takes that prize. 40 Reserve accumulation has been at the highest pace 30 Asia tenth since 2011, and undoubtedly has provided much 20 support to currencies such as the euro and Australian 10 dollar through a rebalancing effect. The backdrop of 0 weak growth and strong credit expansion has provided an unusual mix for such a pace of accumulation. It -10 would appear that some inflows to China have occurred through over-invoicing of exports and 1201 1202 1203 1204 1301 onshore entities taking advantage of the carry offered Scow Owe?* art by borrowing in dollars and lending in Chinese rates. However, over the past week, new measures have Figure 3: China Reserves Flays Surged In 2013 been introduced to clamp on these practices. This should slow the pace of reserve accumulation. 350 s Chma ISS0) Moreover, the sharp decline in the USD/CNY fix over 300 • ncl China tSbni April has also likely added to inflows. USD/CNY 250 I continues to trade at the bottom of the band around the fix, which implies still significant CM' demand. 200 However, this state-of-affairs is unlikely to continue not 150 least because the much anticipated band widening 100 may actually occur over the coming months, and bring to an end anticipatory inflows. Stepping back, what is evident is that US equity OC: markets have been outperforming since 2009, but the 0301 0303 1001 10(13 1 101 1103 1201 1203 13O1 dollar has only started to gain traction since late 2011. 5otont 0a4W.* The 1995 dollar turn also saw US equity Deutsche Bank AG/London Page 3 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0 104710 CONFIDENTIAL SDNY_GM_00250894 EFTA01449343