EFTA01459608.pdf

12 January 2016 FX Blueprint: Forever Young Theme #10: Yen up and be koreageous Buy JPY/KRW, USD/KRW For years, the market has been wary of pushing for Sizeable surpluses that kept KRW on an appreciation KRW weakness, given Korea's sizeable balance of path until late 2014 are no longer the case payments surplus. However, the era of sizeable surpluses is over We expect the recycling of the current • 1.000 account surplus via domestic capital outflows to pick up 1.020 pace this year, driving USD/KRW higher The thinning 1,040 out of the BoP surplus will in general make the won SOSO more susceptible to the global risk environment The • SCSO change in flow dynamics also has ramifications for the 1.100 domestic rates market The increasing supply of duration • 1.120 °striated with the prospect ofportfolio outflows should 1,143 translate into a steepening bias given already inverted • isi50 yield differentials between the long-end KTB and UST sled curves. 1.200 Jan-11 Jan-12 Jan-I3 Jan-14 Jan-I5 For years, the large current account (CA) surplus Korea Net OA • Fin ace USOKR1/4 spot possesses helped partly insulate the won from the Scarce Dann* driet &Wrritel> Paws 1P. rinwetWin CSC strong USD environment. Although the currency started to depreciate more notably in 2015, KRW performance has been in line with that of the region. in 2007, the strong portfolio outflows were neutralized However, the tide is turning, and we believe the won by active hedging activities, which is unlikely this time can depreciate more forcefully, for two main reasons. FX) 1 Unite. 12Pd First, DB Economics expects the CA surplus to shrink moving etas 60 to around $97bn in 2016 from $121bn in 2015, driven by two factors; 1) slowdown in import compression; and 2) the ongoing slowdown in exports. Note that over the past few years, the widening of the current account surplus has been driven mostly by falls in commodity prices - most notably oil prices (peak to trough, oil prices have declined by 45%). Second, the recently-announced measures to -60J encourage outflows will also likely play a key role in Jan-00 Jan-03 Jan-06 Jan-CO Jan-12 Jan-15 further recycling the CA surplus, tilting the balance of 0 po dci not by indents payments towards a deficit, or neutral at a minimum. —ST axonal bestowing and EX depo These channels can be categorized broadly as; 1) Oadl0PMBat eloomberg Pow LP. MIMail•Wits. promoting overseas portfolio investment; 2) a change in the overseas investment mandate for National Falling domestic bond yields are pushing more Pension Service (NPS); and 3) encouraging overseas mergers and acquisitions. In our view, the measures investors to diversify offshore could be more effective this time around compared 50 men Others 0.0% Insurers with 2007. Back then, and despite the sizeable portfolio ss lint minden SIR dM between 1.15•5K SY Weld Orteeeted R outflows by domestic investors, the high FX hedge 05% ratios had countered the impact on FX of domestic 35 outbound investment. This time around, however, the 1.0% 30 - government has e<plicitly stated that IX gains on 25 equity investment are to be exempted from tax. On the 20 bond side, over the past few quarters we have seen a 2.0% strong pick-up in overseas bond investments by lifers Is in search of higher returns (see chart), which in our 10 2 5% view will persist. Simaru to equity, hedoirto on these 5 flows is likely to gradually reduce. As of the start of 0 3.0% CNI 2016, NPS is now allowed to reduce its FX hedge ratio on overseas bond investment by half in 2017 and to nil 0 5, 2g 0 9.2?°29g 0 9..2 .R 0 9,,9?°(9, in 2018. This profound change will also likely be Spec* Odesich• art elloCenberg Finny LP. M...”12 / 49004 eec an vekona followed by domestic lifers. Deutsche Bank AG/London Page 21 CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0120129 CONFIDENTIAL SDNY_GM_00266313 EFTA01459608