EFTA01458987.pdf

8 December 2015 World Outlook 2016: Managing with less liquidity FX Strategy: Plenty of run left in the USD upswing • The multi-year strong USD cycle should extend for at least another two years, with a further 10% appreciation in the real broad USD WV'. !Figure 1: USD real BROAD TWI • 2016 year-end forecasts are largely unchanged, with EUR/USD. USD/JPY performance during USD upward and GBP/USD seen at 0.90, 128 and 1.27 respectively. We anticipate 'cycles extremes in the likes of AUD/USD. NZDiUSD and USD/CAD at 0.62, 0.53 19491% PeWs trot Meow 01 and 1.40 respectively. stn 8%; be It: Borrt-q AvenIs Ws Pe rre9r1 • In macro terms, how 2016 shapes up will be heavily influenced by whether 7946 92.7 .21a 700 0.7 the main macro driver is the Fed or China. If the Fed is the driver, USD 982002 33I .r0 830 OA gains are seen as likely to be slow and broad-based, spread fairly evenly 2011 20.9 sat 50.0 OA between G4, commodity FX and EM FX. If on the other hand, China, Sant OvIelor. Onesciv Sant — particularly China FX policy, becomes a source of instability, USD gains will likely be heavily concentrated in commodity and EM FX, while the G4 [Figtre 2: F ". : lo ',casts majors all outperform. • The USD continues to conform to the multi-year cycle big USD cycles of the 01 09. OK, 105 090 085 117 IN IN IN 185 past. Since the fall of Bretton Woods, big USD down cycles of 9.10 years have 43 y7 13? 10 127 I IS been followed by big USD upswings of 6-7 years. While all cycles are different, Swiss LINeweent Oftesche Bonk Reteiroi the macro backdrop conforms to a view that we are about 2/3rds the way through the big USD up cycle, with the real broad index some 50 months into an upswing. In the same vein, the real Broad TWI has in past cycles largely Figure 3: EUR/USD performance retraced any prior cycle losses, and increased by 53% and 33% in the 1978 - months prior start of FED hike cycle 1985 and 1995 - 2002 upswings respectively. In the last downswing the USD real broad TWI fell by 28%. We expect that the USD will at a minimum fully Mt In 1% .1% retrace these losses, fitting with further real broad TWI gains in the order of I. stem. .22% 75% 4% 4% 10%. In magnitude terms we are then also likely to be a little over 2/3rds the Sant dist:way Deutsch*!NM Noses. way through the USD cycle, with USD gains henceforth likely to come at a slightly slower pace. 'Figure 4: GI0 rate hike cycles The main departure in this cycle relative to past cycles is that the USD gains before the Fed starts hiking rates have been substantially larger than anything we have seen in any fed hiking cycle. This front-loading of USD gains fits with ,ar yr _44. more modest USD gains to come. yes Bo Yes 110 no W No. • mina It would however be premature to think that we are close to a USD top. This YOB Wa ys* Be Ws yes No. • 'MIN CAN No cycle is also likely to be unique in a couple of respects that are very positive for 8M yse spo yes ne W. yes Maybe yes the USD: ow Ye sa 1w no 999 yes No yes No Ian WA Na NM yes we yes No. • ...,no (1) In this cycle, at least for the coming year the Fed, and perhaps the BOE are SWF y.. WS No No. • ening NM yes yes Ws re yes the only G10 Central Banks that are likely to tighten. This is in contrast to most 70%1 0 0 8 5 7 0 1 Fed tightening cycles, when many G10 Central Banks are typically tightening. •Oundomber• on. Tina's awn* •••• ousIptes from In the last Fed tightening cycle, all G10 Central Banks tightened. NetI armed, Sower 0 telehe art Romer* Dessovern (ii) In addition, in this cycle many Central Banks are still leaning toward further Figure 5: 2y US-German spread accommodation, including not least in encouraging their own currency ( forward curve weakness. The US is one of the few countries willing to tolerate currency 190 strength. iii) Some of the most important rate spreads for currencies, notably the 2yr US Treasury - Bund yield spread are seen moving in favor of the USD for the next 5 years, if the respective forward curves prove correct. We expect that some of the likely rate spread adjustment will also end up being front-loaded into the next two years. Sams Mestriwn, Ownet• awal Raw% Deutsche Bank AG/London Page 59 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0 119166 CONFIDENTIAL SDNY_GM_00265350 EFTA01458987