EFTA01451210.pdf

9 January 2014 FX Blueprint: Thin end of the wedge Theme 1t4: - Swiss NOK'd-out We can think of three reasons to go short CHF/N0K. N0K one of highest betas to US cycle, CHF lowest 1. The relative cycle is supportive of rate differentials. af.,' • FX conelations to quarterly US GDP Inflation is at a much higher starting point in Norway than in Switzerland, leaving the Norges Bank much less room to manoeuvre than the SNB in the event of upside surprises to import prices or stronger European growth. Market pricing in Norway has evolved rapidly from three months ago, with the first hike now expected in 03 2015 rather than 01 2014, more or less in line with the Norges' own projections. N0K is also much better placed to benefit from a stronger US cycle with one of the strongest correlations to US growth, and CHF one of the weakest. One risk is house prices, which have risen precipitately in Norway over the last five years, a sharp reversal of which could weigh on domestic demand and prompt Norges' dovishness. We AJI Al I. • ' COP CAD EUR Ce.c -Pv think the risks of this are slim, however, (see theme #6). 5040t• dandy Sri, SA)Yrito•e &Wt.* LP and moderate falls will be welcomed by the central bank as skimming froth from the market. 'Norway flow reversal nearly done, Swiss yet to begin 10% 10% 2. Swiss safe-haven unwind should follow Norway's. ••••44coewipv. MI catto4po Rant %00P Like Switzerland, Norway experienced large-scale safe 5% . s5entloelsed. Mt podloba Rows 5% haven inflows as a consequence of the financial crisis, helping to pause customary current account surplus 0% recycling. In the latter's case, these inflows have largely reversed, to the tune of N0K 190bn on a 2y/2y -5% basis). This has been one of the primary recent drags -10% on the krone, but appears to have largely run its course, in contrast to Switzerland where it has yet to begin. -15% .15 3. CHF also more vulnerable to domestic outflows. -20% '30% As well as the foreign inflow, Norway and Switzerland both saw significant repatriation of domestic assets -25% -35% from abroad. Again, this flow has long turned in -40% 1 L .30% Norway but not yet in Switzerland. One possible Jan-99 Aug.03 Ku.02 Ott-00 May -06 Doc-05 .1,4-06 Firb40 %p11 catalyst will be stronger price pressures next year on &oneDaditrBank ilibiAbstpRAW* LP the back of more robust growth. This should erode real returns Swiss domestics have enjoyed on already some iMare Swiss inflation means CHF weakness of the most expensive assets in the world. Historically, Swiss capital flows have been counter-cyclically related 40.0.YJ IssidNei Pcrlota to prices (chart 3). Indeed, CHF performance closely 033 94,%4 Ch ma tracked changes in real yields last year. By contrast, while conventional Norwegian outflows have resumed, N0K is more protected by surplus savings being invested by the oil fund. 44030 Along with the above, CHF/NOK appears fundamentally misaligned with traditional drivers like oil/gold. Finally, the trade benefits from being USD and EUR/USD neutral (with a 15 year correlation of 16% and -11% respectively). 4,3a003 Harvey, 1.OnCloa 4-14(291754 51947 Jr4? Ao3 0) Mel.02 Oct-03 lAst05 Or-06 A.105 Feb-.0 Sono Coatoots Berk ibeete%Retencs Deutsche Bank AG/London Page 9 CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0 107531 CONFIDENTIAL SDNY_GM_00253715 EFTA01451210