EFTA01449348.pdf

16 May 2013 FX Blueprint: Dashing Buck Theme 1t5: NOK o'Clock The Norwegian krone has weakened somewhat vs. the Figure 1: NOK 1-44 slightly weaker than NB's latest EUR since the last FX Blueprint on Jan 1Q reflecting projection weaker crude primarily but also a Norges Bank that has struggled to make its mind up on what the main focus of monetary policy should be, headline CPI or 105.0 household debt/house prices. 102.5 100.0 97.5 The latest policy meeting would suggest household 95.0 debt and house prices now have the upper hand again, g 92.5 although with the caveat this could change if the krone 90.0 appreciates significantly. However, to be fair to Norges 87.5 it is a nigh impossible job for any inflation targeting 85.0 central bank to balance the dilemma of pockets of 82.5 domestic overheating with external deflation. Add a 2005 2007 2009 2011 2013 2015 solid CIA surplus and a triple-A rating and Norges Bank — Norge, Bank's TWI (144) projection atksill-44 is stuck between a rock and a hard place. What this means for our outlook for the NOK is that the Sane Awn.* Bald Norges Bank's NOK TWI projections matter more than ever. Deviations of around 2-3% or more are likely to Figure 2: CPI below target, but slightly above NB's be crucial over the next couple of rate meetings. projected inflation path Other factors/variables that will be monitored closely at Norges Bank are: a) total credit as % of GDP; b) house prices as % of disposable income, c) real commercial property prices; d) the share of money market funding Nora*. Bonk* 2 5% Inflabon in Norwegian financial institutions. These four trial variables have previously been identified as the key indicators the Bank monitors on an ongoing basis for guidance on longer-term financial stability, and also the main variables that will determine the additional capital requirements for the counter-cyclical capital buffer. 0 2008 2009 2010 2011 2012 2013 2014 ' 2015 Taken together. the dilemma of balancing the risk of domestic overheating versus excessive currency Norway headline CPI, YoY — Norges Barr- CP1 kat Yet appreciation and subdued spot inflation is something Norway shares with a number of EM economies and Soon a.— an also to a lesser extent with neighboring Sweden. However, Norway's dilemma is further reinforced by the lack of an output gap, Norway's accumulated oil Figure 3: Household debt is increasing again wealth, booming oil & gas investments, extremely low unemployment, and large external surpluses. 220 2.50 n 210 - 2.25E The bottom line, with Norwegian monetary policy likely 43200 -200i to continue to be a compromise over the next couple of M180 - 1.75 meetings, the best Norges Bank can hope for currently o r170 - 1.501 is that the correction in Brent crude lower will extend - 125'- and weigh the NOK down. Near-term, and dependent 0 610 150 - 100i on crude consolidating above/around $100/barrel, the 140 -r* - 0.75 re-assessment of the Norges policy outlook favour a higher NOK/SEK. Look for a return to the highs from 2002 2004 2006 2008 2010 2012 late last year. Target 1.1775, with a stop @ 11.90 — Nousenota debt, ells (1.1440 at the time of writing). — Househoto debt as % of asposaore income, In Source DetAlla• Bani Deutsche Bank AG/London Page 11 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0 104718 CONFIDENTIAL SDNY_GM_00250902 EFTA01449348