EFTA01449245.pdf

16 May 2013 FX Blueprint: Dashing Buck Theme la Swiss Cheese Pounded • Swiss investors have significant underweights in It's Not the Inflows. But the Swiss Outflows That foreign assets and "safe havens" globally are Matter turning. Sell CHF vs USD and EUR. • The GBP bear story is not over, in our view: basic cumulating:oft/oft lows, hn Sfr balance dynamics remain explosive, Carney will i00 stay dovish and market positioning is cleaner. Sell GBP vs USD and EUR. Don't Underestimate Swiss Investor The market has been very focused on "safe-haven" inflows into Switzerland in recent years. While these have been big, the bigger story is the lack of outflows. 25cem &war Up to 2008. bond and equity flows by Swiss investors had been running at a 50bn CHF annual pace, mostly recycling savings from Switzerland's large current account surplus. The main destination has been US &sear Daseatee BINS Leccenbeg Nivea IP and European assets, accounting for more than two thirds of Swiss net foreign assets. This abruptly ended after Lehman: the Eurozone crisis, narrow rate iSrviss Franc Is Last "Safe Haven" To Turn differentials, CHF strength and very volatile equity markets all played their part. On all these fronts, we - 133 1800 Gold in BUB terms Ohs) think things are changing however. Eurozone risk premia have been unwound to pre-2010 levels. Risk- 1800 CHF effechve exchange rate lihs) 120 adjusted equity returns are booming. The Swiss franc 1400 has stabilized at extremely overvalued levels, and both - 110 1200 European and US yields have likely bottomed. We 1000 therefore see conditions ripe for a return of the Swiss 100 investor to international capital markets, and believe 800 this will be a major driver behind Swiss franc weakness. 600 90 400 80 All Other Safe Havens Have Turned 200 Aside from domestic-led portfolio outflows, we don't 0 --.---- 70 think the signals from the unwind of other "safe 90 93 96 99 02 05 08 11 haven" trades can be underestimated. Of all the "tail San. (Mew.* &Int abowiwg fOr•VICO risk" trades, we see gold as holding the most similar properties to the Swiss franc: zero yielding, but perceived to hold value at times of stress. With the CHF Is Last To Weaken Around Dollar Turns economy entering an environment of asset price inflation but goods price deflation, gold has proved a Months since currency topped against USD in 1990s poor hedge, and we think the same holds for the Swiss franc. Indeed, medium-term trends between the two 90 1 813 1 Jun 1966 NZDAJ50 are similar, and combined with the huge decline in 70 - Nts cycle sigh, seat when [MY range Eurozone risk premia, we see the risks as skewed 60 - Segos towards an unwind of the more than 150bn of safe- 50 • haven inflow that went into Switzerland over 2010-12. 43 - 30 aca 1906: USURY 20 - NW sea ION. ore CHF Should Participate in Dollar Turn 10 - lam oars Finally, USD/CHF historically turns to lag turns in the o • r, , . . dollar cycle. Back in the 1990s, it turned together with N20 AUD CAD GBP NOK SEK DEM CHF ,IPY USD/JPY and USD/DEM. With our confidence on the dollar outlook building and no change from the SNB on Sant Dmitri* dent Iteartneg finance LP the back of a very benign inflation outlook, we see conditions as ripe for a breakout in both USD/CHF and EUR/CHF targeting 1.00 and 1.27 respectively over the rest of the year. Deutsche Bank AG/London Page 7 CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0104571 CONFIDENTIAL SDNY_GM_00250755 EFTA01449245