EFTA01459706.pdf

12 January 2016 FX Blueprint: Forever Young aversion and high volatility. However, these negative China's slowdown is the starkest, but most of factors are also increasingly well-appreciated by developed North Asia in the same boat markets, and arguably better reflected in valuations. This suggests that a singular focus on external 0.6 -:10 year z-score of 2016 forecast GDP growth vulnerabilities may not be a consistent way to make OA money in Asia this year. irvi( c r ttH 0.2 II RAH),.rei):ht:e.: and divergent monetary policy as drivers -0 of performance. -OA -0 6 Where are the relative weak links in Asia FX on these -0 8 metrics? Based on a simplified measure of output gaps. -1 2 t•er.1 (Chart 4). The underperformance is starkest in China and Indonesia, but also affects a .1 4 PHP INR THB MYR TTAD KRW SGD IDR CNY majority of developed North Asia (Singapore, Korea, Taiwan). The weakness in growth profiles should mean Step DeLexne &gni; alownen Awe* LP, CEK central banks remain dovish here. Another deterrent to Asia raising rates is the additional interest burden on households it would impose In the QE years of low Household debt has surged in Malaysia, Thailand, interest rates, many Asian economies saw a large run- iSingapota, and is at high levels in Korea and Taiwan up in household debt levels. The largest jumps took 90% Household Debt (96 03DP) place in Singapore. Thailand and Malaysia. In Korea so% and Taiwan, outstanding debt levels were already high 1111 OPIISOISIS pre-crisis. Altogether, five major Asian economies now 70% - IN La telt have household debt between 60-90% of GDP. 60% 50% The transmission mechanism of internal vulnerabilities 40% to currency markets, we believe, oil! through the rate differential channel where narrowing 30% spreads between Asian and US rates will be magnified by Fed hikes. We find that the to ;tool-end tete spreads is the :errer, sr /Isis!) FY ;:re TWD. CNY. MYR and KRW. In other words, if rates in these markets rise less than the US (or indeed fall even 20% - 10% 0% PHP INR San aftada Sava LEK iJ IDR CNY TWO , KRW T SGO THB MYR as US rates rise), compressing the rate differential, this is likely to be associated with weaker local currencies. The relationship is not as instructive for INR and PHP THs, TWO and CNY have had the highest correlation to and is in fact inverted for SGD and IDR, where local rate differentials versus US narrower rate differentials are associated with stronger currencies. For Singapore, this is a function of her 3Y FX ccaolmon of USD/Aso to 2Y LCY.UST Bond Spread 1.00 currency-based policy framework which imposes 0.80 uncovered interest parity: an appreciating SGD NEER pushes SGD rates below basket rates, and vice versa. 0.60 While in Indonesia, we suspect this inversion captures 0.40 the fact that the bond-FX relationship is dominated by 0.20 foreign flows and credit concerns: offshore flows and 0.00 lower risk premium drives lower local currency rates. -0.20 but this is good for IDR. -0.40 -0.60 While the externally still vulnerable MYR and IDR will -0.80 continue to come under most pressure during stress -1.00 J periods; outside of these windows, USD strength could THB TWD CNY MYR KRW INR PHP SGD IDR rotate more towards internally vulnerable currencies so. Dan,* &ink faCental; - LP like KRW, 1VVD, CNY and THB from here. Trades: Paola° Sacildeve„cingapore +65 61238947 Buy USD versus KRW (target 1300). TWO Sat-Mtn Seel Singapore, +65 64237510 (target 35) and THB (target 40). Pony Kojorljojo, Hong Aong, +952 22036753 Page 20 Deutsche Bank AG/London CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0120340 CONFIDENTIAL SDNY_GM_00266524 EFTA01459706