EFTA01459603.pdf

12 January 2016 FX Blueprint Forever Young 60-1: The phantom menace The BoJ Is likely to be more sensitive to an appreciating 4: Weaker USD/JPY would require converging real rates yen than to other deflationary developments such as falling energy prices. This is consistent with the focus -- 2Y real rote speed —USOMPY of Abenomics shifting from an unconditional inflation 140 target to (also) a nominal growth target: a stronger yen 130 is harmful in reaching either target, whereas falling energy prices are negative for inflation only. 120 110 Luckily for the BoJ, the exchange rate is a less evasive 100 policy target than inflation. True, a bold expansion of QQE would have limited FX follow-through even if it 90 could be done in size, which it probably cannot. The 80 depreciation in the broad yen of autumn 2014 was -4% - possible because the BoJ enjoyed the first-mover -5% advantage. Yet even in a sharply competitive global FX 2001 2003 2005 2007 2009 2011 2013 2015 space, conventional tools can still be effective in anent Dario.* &.M. etonentsrg Monr•LP capping appreciation against the dollar. At the very least, Kuroda's capacity for jawboning remains high. Last week's talk of Japan not being out of deflation 5: USDIJPY strongly correlates to US yields rather than was perhaps a shot from the hip, but a European-style the broad dollar reconsideration of the zero lower bound or explicit 100% concerns over regional beggaring-thy-neighbour tactics 1? correlation 80% yea USOMPY would go a long way toward reinforcing the Abe put. Hence, although the BoJ lacks the firepower to 60% • engineer a significantly weaker yen, it probably has 40% adequate tools to defend the 118 level against more 20% than transitory risk-off shocks. 0% -20% .Y\sy4.16111\1 4/ Fed: The return of the -40% -5Y UST While Japanese dip-buying and BoJ alertness should -60% uSD NEER put a floor under the cross from the Japanese side, any -80% upside needs to come from the US. Bulls need not rely on a strong broad dollar, with which USD/JPY -100% 1994 1995 1998 2000 20O2 2004 2006 2008 2010 2012 2014 historically has a tenuous link in the medium-term. The main correlation is with US yields, which are nicely saferDeno* Ito* eibtvetati Anne LI cushioned by two factors. First, market pricing for two Fed hikes is extremely dovish and the risk is for the 6: Positioning is now marginally long; vol skew is too market to converge with the Fed. The threat to the US high economy pertains to growth, whereas the buoyant labour market probably calls for tighter policy than the 130 ---- Net IMM short positioning Ith market prices. Second, although global term premiums contracts. inverted, have taken a hit as China exports deflation and • 120 uncertainty, the PBoC's reserve run-down also acts as —USD/JPY Irhsi 110 an automatic stabilizer to yields. Similarly, the drag on inflation expectations from oil is offset by reserve draw- 100 down in oil-producing economies. The risk to US yields, in our view, is the PBoC capitulating against outflows 0 and allowing CNY to find a new equilibrium quickly. Yet in light of the degree of intervention in December 50 90 this amounts to an improbably extreme regime break. 100 70 2005 2006 200' 2008 2009 2010 2011 2012 2013 2014 2015 Positioning: The attack of the longs Positioning in the yen last week flipped to marginal 'one Deursthe Setk. ekeetery Reny 0 , longs for the first time since October 2012. Three- month risk reversals are as a result stretched on any measure. Skew aside, we like buying USD/JPY at Ta *0 Tanaka, Tokyo + 81(3)5156-6714 current levels, viewing it as the lower-end of a 118-126 Robin Winkfor, London +44 PO/ 754 71841 range for this year. Page 14 Deutsche Bank AG/London CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0120122 CONFIDENTIAL SDNY_GM_00266306 EFTA01459603