EFTA01459599.pdf

12 January 2016 FX Blueprint: Forever Young This large policy divergence will put further upward by encouraging more capital outflows pressure on USD/CNY, as narrowing rate differentials encourage carry-seeking trades to unwind and support 50% 1 000214 %Yo onshore repayment and refinancing of USD liabilities. A 450 1moving sum 4 5% simple historical relationship would suggest that for 350 40% every 100bp of narrowing in rate differentials. 250 35% USDICNY tends to move higher by 30 big figures. 150 i 30% 50 25% Finally, FX outflows will likely persist and remain an -50 4 important driver of RMB weakness this year. In 2015, -150 1 2.0% China recorded about $700bn of FX outflows despite .250 1 5% having a sizeable current account surplus. In 2016, we 10% believe this will be repeated, considering: growth 2010 2011 2012 2013 2014 2015 headwinds are unlikely to dissipate; and 2) corporate are likely to continue to unwind FX liabilities. Acc X resents 27 bond tweed ben een US & Chine Extrapolating the latest total foreign claims reported by Sawn Dwrica•ew; Weentwo MannIF. WC HavetansWits BIS (through June 2015), we estimate the total amount of FX claims at around $800bn as of end-2015. During the Asian Financial Crisis in 1997/8, the FX liabilities of FX liabilities in China are declining but remain large Hong Kong. which has a pegged FX regime, fell -40% and further adjustments are stil€ likely while those of Korea, which has a flexible FX regime, fell -55%. Assuming China stays with a managed rate 1.200 • Others Cwency & Deco of depreciation, this would suggest --$300bn of FY Loans liabiiities could still need to be delevereci. This is only 1000 suume Tune Crixle marginally smaller than the current account forecast of SOO —515 Taut facer barks' clams X LC $314bn from DB Economics. And there are other possible outflows to consider, like: I) increased desire 503 for domestic investors to buy more offshore assets, evident in an increase in services deficits; and 2) further 400 unwind of carry trades, evident in China's widened 200 E&O deficit over the past two years. Put together, we expect outflows to continue to overwhelm inflows. putting upside pressure on USD/CNY. 1200 • Mer-04 Mar-06 1.4w-Oti Mar-10 Mr-12 Mar-14 We see risk of RMB weakness being front-loaded in Son Damnan daonlos MunnLP. arc ?Owit AnoWet an first half of the year, because 1) current account surpluses tend to be smaller in 1H vs. 2H; 2) seasonal economic data tends to be weaker in the first half; 3) lOutflows from China should still be large enough in expectations that the Fed will hike more actively in 1H 2016 to recycle sizeable inflows (two 25-bp hikes) while the PBoC could cut more actively; and 4) ahead of CNY's official entry into the 700 fiEn Net IMF's SDR basket on 1 October. 600 koo° debt We favor buying 6M US0/CNY 6.85/7.15 call spreads 600 \Net to express our view that RMB weakness is not yet over. We also see value in buying USD/TWD as a proxy trade equity 400 to CNY, given the close economic links between the two economies and the high beta exhibited by TWD to 300 CNY. 200 Trades. 100 • Buy 6M USIDiCNH 62517.15 call spread 0 • Buy USVIVVD, target 35 Inflows Outflows San DRAWS, v Paosbn.Inns v. rnC newamnete ill Perry Koiodjoio. Hong Kong. +852 22036153 Sarney,. Goel, Singapore, +65 64237510 Sachdeva, Singapore, +65 64233947 Page 8 Deutsche Bank AG/London CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0120116 CONFIDENTIAL SDNY_GM_00266300 EFTA01459599