EFTA01459705.pdf

12 January 2016 FX Blueprint: Forever Young Theme #9: Asian provocateur Buy USD vs TVVD, KRW and THB Investors should diversity their focus from external !External vs. internal vulnerabilities: Asia scores highly vulnerabilities in EM (current account deficits, reserves, ion the former, but increasingly poorly on the latter foreign ownership) to include internal vulnerabilities (output gaps, domestic indebtedness). As the fed hikes, Axon GDh yam I a USO TVI:t 000 rate differentials will narrow more in internally II 420 vulnerable EM markets. THB, 7WD, KRW & CNY stand 400 out as the shorts to capture this theme in Asia. ci IMMW **** 40) 460 For global FX investors, Asia has arguably been a place .1.00 to hide in recent years. On average, current account Ate 010 &WA ulam As* tam RCA 010 positions in Asia are healthier; the beta to the USD has 040 tee 2-scraeot3:553 GOPGtoton been significantly lower; and FX volatility much lesser 020 fctactai !tato Ch.v.po 2016 opal than other regions (Chart 1. top half). Admittedly, there a is large infra-Asian heterogeneity, with the likes of 020 All Il . I 2o Malaysia and Indonesia hardly subscribing to these 040 to 003 o favorable characteristics. But on average, Asian 020 to currencies can be said to have been less externally 403 -20 vu€nerable than her EM and even G10 peers. GiO °AEA Al. Later, Lawn BACA G10 be Sant Dana*gat Ilaanteg taws LI! WC Na We coAla It amps escitaptft Twofers co ant exam grant.NW However, when shifting focus to internal vulnerabilities wester te axateltensoco Ia ION - such as output gaps. domestic' indebtedness, and demographks ;hit .)rctiire ni; knnocl !,; ( 4H, ,i; for Asia. The slowdown in growth in Asia, measured by Asia hdjusting to slower growth reality - more to go the 10 year z-score of 2016 growth forecasts, is second 9. — Growth Geo Asia I'M le Average) worst to Latin America. Importantly though, unlike 8 - R:En AS); I el. YoY % Latam, where central banks are still expected to hike 7% rates along with the Fed this year, Asian central banks remain biased to ease further (Chart 1, bottom half). 6 Asia is the only region where policy rates on average 5 will be coming down. This will be led by cuts in China, Indonesia, and India, but with the risk that other 3 economies performing below potential also feel compelled to ease Interestingly, the performance of 2 average Asian HEEHs has tracked the growth 'advantage' of Asia over developed markets very tightly o f in the past (Chart 2). The recent correction in Asian 01 02 03 04 05 06 07 06 09 10 11 12 13 14 15 REERs is consistent with a 'catch-down' to the Savor 0•40cher far* CPC St Aker AmPoir• narrower gap between Asian and DM growth, as Asia has slowed and developed markets picked up some pace. But, the Asian FX adjustment appears incomplete, IMYR and IDR are still at the rear end on almost all with room for more weakness before the slower !external vulnerability metrics growth reality is fully priced in. 5 Resersiscomforshortainsexismeldebt In EM crises. thc, c),t t. fermi vulnerabilitie‘t;: current account deficits, foreign ownership of domestic securities, USD denominated external debt, commodity exposure. and reserves coverage, amongst others. Indeed, these have been the 3 differentiating metrics for EM FX for the past few years. In Asia. the two currencies which show up on the rear 2 end of these metrics are Indonesia and Malaysia. Reserves coverage for short-term external debt is the poorest (Chart 3), foreign ownership of local currency government bonds the highest at 39% and 47% 0 pti KRW CIt. ma ¶WD INA IDA PAR respectively, and current accounts are most exposed to lower energy prices. These vulnerabilities will keep IDR Soon* dawns Bank CEIC and MYR most liable to weaken during times of risk Deutsche Bank AG/London Page 19 CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0120339 CONFIDENTIAL SDNY_GM_00266523 EFTA01459705