EFTA01451211.pdf

9 January 2014 FX Blueprint Thin end of the wedge Theme #5: Dingo unchained ▪ 2013 saw the largest fall in AUD/NZD in over 28 Figure 1: Large declines in AUD/NZD usually see years. Behind the fall in the cross was a significant bounces move in interest rate differentials. • With the cross near record lows we think the risk / AMUI [Nap In AUX= reward from here favors AUD/NZD upside. As a MO s result we would be long AUD/NZD at current levels. MO 1 As shown in Figure 1, 2013 marked the Worst' year for the AUD/NZD cross since at least 1986. Interestingly, in 'Co prior years when the cross has fallen over 10% the subsequent year sees a significant bounce back. The 13.5% fall in 1987 to 1.0959 was followed by a bounce II of 23.5% in 1988; while the 12.7% fall in 2002 (to 1.0727) saw a 6.7% bounce in the following year. With the cross ending 2013 at 1.0850 after a 14.0% decline, .15.0 • history would suggest some likelihood of a significant move higher in AUD/NZD over 2014. Scut* Oastro. Sint illeember rowsc.t LP Of course there is much more to FX than history. From a more fundamental perspective we see a number of reasons to expect a move higher in the AUD/NZD cross Figure 2: The cross is also et an extreme through the course of 2014. AllYNZD The first is valuation. As Figure 2 shows, the AUD/NZD cross has traditionally found a base around 1.05 (with just below here therefore likely to serve as a good level to set any stop). Our valuation metrics (as published in Exchange Rate Perspectives) also find NW the most over-valued of the G10 currencies on a PPP and BEER I V, basis. The NZD is around 33% 'expensive' on a PPP basis, versus the AUD which is 26% 'expensive'. On a BEER basis the NZD is 22% 'expensive', versus the AUD which is only 5% above 'fair-value'. oe.. As far as 'big picture' drivers of the AUD/NZD cross are uwN to Vwr Myr Me IT Mr°, /Ara> Mr.) concerned, it is hard to go past interest rate differentials as shown in Figure 3. Looking a little more San O•14W*. eat illOanter ,.t.. Arc LP closely at the last few data points in that chart it also appears that AUD/NZD has 'overshot' interest rate Figure 3: Interest rate differentials are the key driver differentials to the downside. Indeed, the current interest rate differential would appear to be more AUOMZD Ind ;newest rao cliFfoinnida consistent with the cross trading around 1.13 versus its :10 current level. We should not, of course, rule out interest rate differentials 'catching up' to the cross. 240 That would require, however, markets to price even I CO more tightening for the RBNZ, and/or easing from the 100 RBA. 060 On the outlook for the kiwi central bank our central OCO view remains that we will see 75bps of policy .0I0 tightening over the course of 2014. Market pricing is a eA Ice little more aggressive than that, with a little over 1C.O 100bps of hikes priced for 2014. On the RBA the market is essentially priced for no change in rates in Sep Oa it: (4 in IC Snit Se, i1 13 7.-,0 200 Australia over the coming year - something consistent $w DeutiM. eat BlearrbetiRumorLP Page 10 Deutsche Bank AG/London CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0 107532 CONFIDENTIAL SDNY_GM_00253716 EFTA01451211