EFTA01446663.pdf

9 January 2014 FX Blueprint: Thin end of the wedge Theme #8: Balti not faulty, China yet finer 2013 saw Asian FX fracture into a North and South Indian exports have been a bright spot in Asia complex. Relative sensitivity to the yen, the EM debt bubble, and the developed world equity/growth cycle 15 YoY exports growlh - North Asia IKR.1W, CH) all served to discriminate the two intra-regional groups Goma I%) ASEAN-5 at different points during the year. Ultimately, the North - fricha 10 emerged fairly unscathed, while the South cheapened significantly. Indeed, much of South Asia FX still faces a host of challenges from political instability (THB), offshore debt holding overhang and weak commodity prices (MYR, IDR). However we refrain here from adding to shorts against most of this group, given a mix of large valuation adjustments, expensive carry, -5 and/or improving policy responses that is shifting the risk-reward. We concentrate instead on currencies like -10 INR where fundamentals have improved sufficiently to Jan-12 JJ-12 .10.13 Jul-13 go long, and on SGD, where persistent overvaluation and exposure to a broadening in USD strength out to Scum'Daum.Rya, Rowley,Frovice LP J low-yielders favors a short bias. In North Asia, we stay short USD/CNH, but are mindful of the large build up in The outlook for debt flows is asymmetric in India positioning. We favor a short JPY/KRW position to mer 1 MR 00463 express our positive view on Korean fundamentals. FR takings of Irrellon 0-Sece 1201 Imir fof G-Sau The rupee has had a makeover 100 1 After spending three years as one of the world's worst performing currencies, the rupee should fare better in a0 2014 for three main reasons. First, India has seen large improvement in her external balances. The trade deficit, so - which is the only driver of the CAD, has almost halved from its peak. While gold import compression has so - Cam arrer of driven most of the trade improvement and could face hokligs1 20 - slippage, exports and services have also been bright spots. Second, even as India's portfolio flow , dependence is falling, both debt and equity flows could 2003 2005 2010 2011 2012 2013 see positive swings. After aggressive debt outflows Sorer* Dania• as* a SIN between May-Nov 2013, offshore holdings have fallen to "core" levels; indeed, foreigners returned as buyers in December. With large unallocated limits, a more Broad consensus on SGD's overvaluation positive duration view, and the possibility of index inclusion and/or Euroclearability, India could attract 30% %Orr(•Minderl-froluotion of use money. The key swing factor for equities will be general elections in May. To be sure, this is a binary 20% event; but hopes of a pro-growth stable coalition could boost inflows in the run-up to elections. Third, RBI's 10% - swap activities have been a success adding to reserves. 0% Concerns about oil USD demand appear exaggerated, and its return to the market in November did not raise -10% volatility. Majority of their obligations to buy USD scream, PPP ahead of imminent swap repayments have been met. •Reative FEER -20% o BEER We are long a 6M USD/INR 62 put with an RKO at 57. • Averecf -30% WO no longer ling SGD PHP THB MYR HAW 1WD IDR INR We have seen a long USD/SGD view as a good 'long- Saw aman*•ay - atopergimenc•LLR CDC haul' trade to play for USD strength and US yield re- pricing. However, the lesson from 2013 was that USD/SGD took its cues more from the USD/G10 1VVI than its USD/Asia peers which often behaved Deutsche Bank AG/London Page 15 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0 100964 CONFIDENTIAL SDNY_GM_00247148 EFTA01446663