EFTA01459595.pdf

12 January 2016 FX Blueprint: Forever Young Overview Forever young FX mar Pet USD/JPY is also likely to stay strong. The balance of This year's Blueprint title is not intended to argue payments doesn't point to JPY strength either. The against the grimness with which risk assets have current account has been improving, but this has been started 2016. Instead, it is an expression of confidence more than offset by persistent FOI and portfolio in a trend that has proved remarkably resilient since the outflows. We thus like buying USD/JPY. end of the financial crisis: the ongoing strength of the dollar. Albeit maturing and far from young, we still Watch out Britannia believe there's vigor left to the dollar in 2016. There are The UK will undergo the largest fiscal tightening of any plenty of fresher themes in this year's Blueprint too. major economy this year. Add to that a stretched First, we see scope for more weakness in those current account deficit and likely referendum on the currencies that have lagged the dollar upcycle. This country's future in the EU, and a big fall may be on the makes us particularly bearish on GBP but less so on the cards. We stick with our bearish GBP/USD JPY. Second, we have a particularly negative bias on recommendation entered into at the start of November. Asia. Not only have the region's currencies lagged By contrast, long-awaited Swedish krona strength overall dollar appreciation, but internal vulnerabilities should materialize this year. Near-term, though, the are high and rising. China's currency adjustment has Riksbank will be reluctant to tolerate more appreciation much more to go. Third, we have a lesser focus on RV given wage negotiations in the first quarter. We couple and intra-regional opportunities compared to last year. a medium term short GBP/SEK trade with a tactical In a world of high volatility and low liquidity, we mostly recommendation to buy a 3m EUR/SEK risk reversal. stick with big picture macro drivers in FX: a market that We also like re-entering CHF shorts against euro and remains "forever young" in both its themes and trading yen based on renewed outflows and light positioning. opportunities for 2016! Diverging commodities bloc Euro to break parity AUD and NZD have little to cheer about this year. We remain euro bears and target a move down to China FX weakness impacts both disproportionately 95cents by the end of this year. The key difference given their trade-weights, but it also supports domestic from last year is that the dollar will have to do more commodity production in China by pushing commodity legwork. This is why we also like buying the trade- breakeven prices lower. Combined with challenging weighted dollar. The USE) should be helped by its move balance of payments dynamics and FX that has lagged into the ranks of a high-yielding currency by year-end, the overall rally in the dollar we are bearish on both the large-scale repatriation of American capital, and the Antipodes. We are less negative on CAD given the record run of negative US data surprises that poses magnitude of the adjustment and closer ties to the US upside risks versus expectations. Europe can't be business cycle and would buy against NOK. forgotten either, however. There remain persistent risks of additional easing from the ECB, but we show that Rest of Ervi EX even a potential (hawkish) repricing of ECB QE In the rest of EM we retain our long-standing expectations later in the year will not matter that much bearishness in ZAR as there are few signs of the for EUR/USD compared to the Fed. required external adjustments and SA remains particularly exposed to China. We see scope for PLN It's not over for the Renminbi outperformance versus HUF given divergent growth We believe yuan weakness will continue over 2016. and monetary policy and are also bearish ILS. In LatAm Further unwinds of carry trades, FX liability hedging we like to buy MXN/COP on fundamental divergence, due to poor fundamentals and higher credit risk, and greater Banxico FX tolerance and undervaluation higher tolerance for currency depreciation by Chinese versus oil. We also like buying PEN/CLP and argue that authorities should all help. More broadly, Asia stands EUR/EM volatility is underpriced. out among EM FX as the region which has the most to adjust from post financial crisis imbalances. Output Last year's Blueprint trades gaps, domestic indebtedness and demographics are all Our three FX Blueprints generated a combined return likely to be exposed to widening rate differentials of 4.2% last year with a hit rate of 55%. The best- versus the US in 2016. We expect persistent currency performing trade from the September Blueprint was weakness in CNH, KRW, T1-16 and TWD. long USD/ZAR (+14%) and the worst-performing was long AUD/NZD (-5%). See detailed returns on p. 31. We'ro not turning bullish JP`r yot On to 2016! Consensus is becoming bullish on the yen, but we think it's too early. The BoJ is unlikely to tolerate George Sal-dye/cc: London +4420)754-79118 additional FX strength, while Japan Inc's support for Akan Rusf,in Now York +7(272)250-3646 Page 2 Deutsche Bank AG/London CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0120110 CONFIDENTIAL SDNY_GM_00266294 EFTA01459595