EFTA01451184.pdf

9 January 2014 EX Blueprint Thin end of the wedge over view Sticking to regime change; dollar uptrend A neat way of playing the lead-lag between different 2013 marked a fundamental regime change from the segments of the market to the normalization in crisis-prone 2008-2012 period. The dollar's correlation developed markets is to buy the Norwegian krone and to equities flipped, the euro-area avoided a crisis and sell the Swiss franc. The former saw a large unwind of the Fed announced a rolling back, rather than an post-crisis safe-haven inflows last year, while safe- expansion, of QE. If there was a locus of crisis it was in haven flows to Switzerland have yet to be unwound. emerging markets, which felt the shock of Fed taper. We should start to see this happen in 2014. Elsewhere This could hint that the 1990s dynamic of first half in Europe, the Swedish krona should do well as the dollar weakness and developed market crises and Swedish economy finally catches up to German and US second half dollar strength and emerging market crises economic strength. could be repeating itself. Asia Pots winners and loser:, We therefore remain committed dollar bulls. If last year In the Asia-Pacific region, one of the largest cross was all about the US long-end being re-priced on taper, moves in 2013 was AUD/NZD, but we expect a major 2014 will mark the re-pricing of the US short-end. reversal this year. Aside from attractive valuations, the December's Fed decision therefore represents only the rates markets will likely price a more hawkish RBA thin end of the wedge for US interest rate compared to an already aggressively priced RBNZ. normalization and its effect on markets. This should We'd look for the Korean won to outperform the allow the USD to strengthen against the core European Japanese yen on an improving current account, a pick- hold-outs to dollar strength, the euro, Swiss franc and up in global growth and a robust domestic financial pound. The equity flow picture should finally move in system. The Singaporean dollar will struggle as favour of the US as slow-moving capital adjusts to the valuations are stretched, household debt is elevated new DM regime. Our favourite expression of dollar and the currency is closely tied to the overall dollar strength would be to buy it against the three most trend. Finally, we'd still buy CNH as the current over-valued currencies in the world, the New Zealand account, inflation and likely capital inflows are Dollar, Swiss franc and Singaporean dollar. supportive, though we remain wary of the carry unwind dynamics seen in the currency. Yen trend still down While we are looking for a reversal in core European ramie EM; strong EM currency trends, on the yen we remain firmly in the The Indian rupee is the only 'fragile five' currency we bearish camp and look for a trend extension from last like to be long. Current account improvement, portfolio year. What adds to our confidence is that major yen inflows after last year's reduction and beneficial policy turns tend to see the yen move by 43% on average,and action adds up to a bullish case. By contrast, the we're nowhere near such a move yet. On fundamentals, Turkish lira and South African rand should continue to the BoJ is also conspicuous amongst the major central struggle as their current account dynamics are poor. banks in ramping up QE, the basic balance of While both Indonesian rupiah and the Brazilian real also payments is heavily negative and foreigners have yet to suffer from rickety current accounts and domestic unwind their safe-haven inflows to Japan that were dynamics, better valuations and high carry may prevent accumulated in the crisis years. excessive weakness. Not all EM is bad. We like the Polish zloty, Israeli shekel and Mexican peso. The first on growth, the second on commodities and third on host ct GIO expected FDI and cyclical pick-up. We underestimated UK growth in 2013, but for 2014 we intend not to miss the changes in the UK economy. The starkest one will likely be the pick-up in inflation, Last year's Blueprint's Trades which will only add to expectations of a more hawkish Our trades from the last Blueprint were mixed. Our best Bank of England. The pipeline for FDI into the UK also trade was going long MXN/BRL (+7.1%) while our looks good. The main weakness for the pound remains worst was being short TRY/ZAR (-3.6%). Overall, 6 of the current account deficit, so as a FX trade we like to the themes made money while 4 lost money. Overall, buy the pound against another current account deficit our 10 themes made a 0.47% average return. currency, the Canadian dollar. Helping the bearish CAD case is that expectations of a hawkish Bank of Canada 8441 Hake: London .44 (20) 7547 1489 appear overdone given the disconnect between the US and Canadian economy, the likely reversal of the surge of bond inflows seen since 2008 and a turn lower in commodity prices. Page 2 Deutsche Bank AG/London CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0 107472 CONFIDENTIAL SDNY_GM_00253656 EFTA01451184