EFTA01446660.pdf

9 January 2014 FX Blueprint: Thin end of the wedge CAD Flow Picture Very Nega We are more bearish CAD. Speculative shorts are K Inflows Could Improve. Opposite of Canada building, but on the portfolio flow side, the balance of payments is characterized by a large overhang of fixed 1100 1 2500 Cumulative bond inflows, income inflow positions as a by-product of Fed OE (chart 4). Canada benefitted from close to 280bn of 1000 local currency, bn "excess" inflows over the 2010-2013, which have 2000 50bn plugged a sharply wider current account deficit similar "0 (UK) in size to the UK. The UK, in contrast, has suffered from 800 1500 1 a lack of inflows in recent years (chart 4). While FDI 700 and underweight fixed income positions have the +280bn 6 (Canada) 1000 potential to "plug" the UK deficit, the risks appear skewed the other way in Canada. 500 change elottve 500 On the monetary policy side, Canada doesn't appear to trend well placed to benefit from an improving US cycle 300 either. Rate expectations are already running ahead of the Fed and BoE by a quarter, and given the BoC's 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 renewed dovishness there is limited potential of these happening sooner. Indeed, the correlation between US Settee Greer larlern Sewn& INS 1 and Canadian data surprises has dropped off sharply over the last few years, pointing to the divergent trends GBP1CA() 'Current Account Neutral' Cross in local housing markets and domestic leverage. To boot, Canadian terms of trade have clearly peaked 10 - Cumnt account deficits., lacy bn (chart 6), with the currency moderately expensive versus non-energy commodity prices and supply glut in 5 Canada North America oil production providing an additional headwind. 0 Big picture, GBP/CAD is a dollar-neutral cross, with correlations with other USD crosses all lying below 50% over 1-3 year time horizons and zero correlation with the UK broad USD TWI since 1995. The relative performance -10 . between UK financials and Canadian stocks does a decent job of explaining big picture turns since the early 1990s. The cross remains more than 20% below its pre-crisis -15 average suggesting plenty of potential for upside as the -20 respective domestic stories play out. 90 91 92 93 95 9697%0001 02 03 05 06 07 08 10 11 12 Sourer Draw Sark acerelorep Anew George Sanyolos, London. +44(20) 754 79118 Oliver Hanley, London, +44(20) 754 57947 1USD/CAD Following Commodity Prices Lower 'GBP/CAD a Beta Neutral Cross 95 97 99 01 03 05 07 09 11 13 0.85 2.6 —GBP/CAD Ohs) —UK fins cialsiTacwo stock index (ihs) 0.95 2.6 I' 0.9 1.05 2.4 0.8 1.15 35C 2.2 L 0.7 1.25 0.6 30C 2 1.35 0.5 1.8 25( 0.4 1.45 1.6 r 0.3 1.55 20C 1.4 0.2 1.65 — USD/CAD (I s. inverted) 93 95 97 99 01 03 05 07 09 It 13 - BoC Non-energy Commodity Price Index (rhs 5( Seem Dereicee SW* 50110•' DOCCOM lent deerobeg Awn.* UP Page 8 Doutscho Bank AG/London CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0 100957 CONFIDENTIAL SDNY_GM_00247141 EFTA01446660