EFTA01449345.pdf

16 May 2013 FX Blueprint: Dashing Buck Staying Beark;h OBI' IUK vs Avrg US & Euro Data Surprises At Extremes We've been bearish sterling since the start of the year and stick with the view, despite the last few months' squeeze. First, the recent run of positive UK data 1 surprises versus the US and Euro-area appears to have 0.8 reached extremes. Even if the run of positive UK data 0.6 continues, it is difficult not seeing a greater catch-up 0.4 from the country's two main trading partners. 0.2 Second, outside of its recent potential to squeeze GBP shorts, we don't think the moderate improvement in -0.2 the data outlook matters much anyway. Unlike the Fed, -0.4 the BoE won't shift to less easing anytime this year, so -0.6 the market can't price much in terms of relative -0.8 monetary policy tightening. In contrast, GBP .1 correlations with risk appetite (eg. the FTSE) have 04 06 oe 10 12 shifted to negative over the last two years. Improved Saone DRAISO &Mt risk appetite is associated with higher portfolio U outflows from the UK given the extremely low level of real yields - the lowest in the world. UK and Canada Ha'ee Worse Basic Balance In World Third, we believe that flow, not data, will be the Sum Rank al basic Mime HMS dominant driver behind GBP. On that front, we think it C/A • FD4 C/A • FDI • Portfolio is fair to say that sterling has the worst flow dynamics 560 HUF in the world. Portfolio inflows remain exceptionally NOK SOD weak due to very negative real yields. The trade two MYR balance remains stuck in deficit due to the high share HUF CNY of services, the big rise in ULCs in recent years, as well MYR MXN as persistent negative J-curve effects. Perhaps even CNY SEK more worrying, the investment income balance is SEK PIP deteriorating rapidly. This, not trade, has been the CHF TRY biggest drag on the UK current account and has small ILS RUB potential to improve in coming months. For any EM RUB TI-18 country, this deterioration would flash warning lights PHP KRW on the sustainability of the external position. This is KRW ax very negative in the UK and growing. On top of this, it CZK PLN stands in sharp contrast to the US. Even though both THB EUR have current account deficits, the UK appears to be 0.P CHF suffering from a more structural decline in the relative 8RL 8RL profitability of its foreign investments - pointing to a EUR USD more permanent decline in the UK financial system's AUD AUD capacity to transform foreign "safe haven" inflows into JOY IDR higher-yielding foreign assets. IDR ILS PLN CLP Finally, the risks are skewed towards higher "political" AWN NCK and "policy" premia on GBP. The continued dramatic NZD TWO decline in Eurozone risk premia should hurt GBP the TRY NZD most given that sterling has been one of the biggest USO MR GBP -WY beneficiaries of "safe haven" inflows from the Eurozone. INR CAD On a more medium-term basis, the ongoing domestic CAD ZAR political debate around an EU membership referendum ZAR GBP on top of EU initiatives towards increasing regulatory enfry °wraith..oder tAt pee 5 'net burdens on the financial sector (financial transaction San. &Icar 6.9 Fnm• tax, among others), will do little to provide a medium- term uplift toUK structural competitiveness. George Saravelas, London, Page 8 Doutscho Bank AG/London CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0 104715 CONFIDENTIAL SDNY_GM_00250899 EFTA01449345