EFTA01459602.pdf

12 January 2016 FX Blueprint: Forever Young Theme#6: Don't Toshin the towel — buy USD/JPY It's too early to turn bearish USD/JPY. Japanese It: Japan's trade deficit has been closed by import dip-buying and BoJ alertness should support (compression, largely thanks to the energy windfall USD/JPY around 118 though offer limited upside. Buy USD/JPY but take profit at 125. 60 96. y/y, 3nma Japan's current account: The force awakens not 40 Japan's balance of payments continues to support USD/JPY and has not turned bearish. On the trade side, 20 although the trade deficit has shrunk to close to zero, this is largely because falling energy import prices have 0 offset the export drag from stuttering growth and -20 depreciation in developing Asia. As oil prices approach rock-bottom, the windfall should peter out, while -ao export headwinds from Asia persist. On the hedging side, the recent widening of the cross-currency basis $0 60 acts as a new deterrent to currency hedging which 1993 1996 1997 2000 2002 2004 2007 2009 2011 2014 corporates have been foregoing over the last year even in the face of a stalling USD/JPY uptrend. Sant Ono*•Ant Szenbag France LP Even without a contribution from trade, the current 2: Portfolio outflows are the swing factor on the BoP account posts a comfortable surplus thanks to vast and the trend remains robust it slowing investment income. Yet the entire current account menTreckt JPY tn, 3mma surplus is used up by net FDI abroad. Indeed, retained e1 am Portfolio amount FDI earnings comprise a large chunk of both the current —B • ad basic balance account surplus and FDI outflows. These are offsetting a / accounting entries rather than cross-border flows, and 4 .1 their sheer size stabilizes the CA/FDI ratio. For now, 2 Japanese corporates enjoy the earnings power to keep investing. Hence, FDI flows will give little impetus to the yen in either direction. -2 GPIF. The empire can strike back Portfolio flows therefore are the potential swing factor -8 I on Japan's BoP. Although monthly volatility has picked 03 05 07 09 11 13 16 up, the quarterly trend of large net outflows is intact. Dollar demand from the GPIF and other institutional Sacco DeuVe*PH, Scontev Antra LP investors is less consistent and price-sensitive than in the halcyon days of the re-allocation trade. The GPIF is 3: Portfolio outflows continue to weigh on the basic soon to reach its benchmark allocations to foreign balance assets, completing the mechanical rotation. 2.500 • Foreign bond Nonetheless, it retains some firepower, and the eta-chases. discretionary bands around the benchmarks allow for Correlation = 41% 2.000 JPY On Emma tactical trading. Other institutional investors also 1,500 continue to buy dips in the cross, and retail demand through toshins has become more than a secondary 1,000 force. The contrarian tactic of Japanese investors also 500 means, however, that they tend to take profit on squeezes. This underpins our view that USD/JPY will 0 stay range-bound over the next four months, though -500 - short-term volatility could remain high. Japanese - Non1J51) —U50 investors continue to buy USD assets at the expense of other currencies, especially in fixed income. Hedging ratios remain low. One reason is the widening basis. 05 06 07 09 09 10 11 12 13 14 15 Indeed the flipside is that foreigners have liked Aka Daum**rat BILentbap Anneal, synthetic exposure to JGBs funded in yen. These inflows have at times offset Japanese portfolio outflows on the BoP but are in fact FX-neutral. Deutsche Bank AG/London Page 13 CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0120121 CONFIDENTIAL SDNY_GM_00266305 EFTA01459602