Global

Macro

8 December 2011

FX Strategy Weekly
G10: While there has been much focus on the sustainability of Italy and Spain in recent months, a more pernicious risk has started to be more openly discussed, the possibility of a Euro-area break-up. Our view has always been that such an outcome would have dire global systemic implications (see Exchange Rate Perspectives; December 2010). Indeed, our base case remains that such an outcome will not materialize.

Market Update
Research Team

Global Markets Research

London
Caroline Grady Henrik Gullberg Caio Natividade George Saravelos Lamine Bougueroua Siddharth Kapoor Kaifeng Chen

New York
Alan Ruskin Drausio Giacomelli Daniel Brehon Mauro Roca Guiherme Marone

EMEA: Gamma positioning is lighter across the board in EMEA FX. Current gamma positioning is not prohibitive to our view - USD/TRY to stay in the 1.70-1.90 range in the near term. Unwind of long vol positions going into year end - combined with the moderation in implied vols - means we could see rebuilding of long vol positions going into January.
LatAm: We present our main views and strategy recommendations for LatAm FX. We recommend maintaining exposure to MXN by switching to short CAD/MXN and to position for a temporary retracement in BRL with zero-cost 1M USD/BRL put spreads. We also recommend maintaining short EUR/CLP and long USD/PEN. We remain constructive on COP with a medium term perspective, but recommend avoiding exposure as we approach the usually complicated end of the year. We remain bearish on the ARS but the NDF curve has already incorporated enough depreciation at longer maturities. Nevertheless, some investors may find attractive receiving carry in the shortend of the curve. Market Starting to Price Greek Exit From Euro-Area
40 35 30 25 20 15 10 5 0 -5 -10 -15 Jan-10 May-10 Sep-10
Greek Int'l bonds (trade at discount to local sovereign Greek Int'l Sovereign bonds (English law) trade at premium to Greek local sovereign bonds (Greek law)

Singapore
Bilal Hafeez Dennis Tan Sameer Goel

Sydney
John Horner

Head of FX Strategy
Bilal Hafeez

points, average of Int'l sovereign (FRN) minus local soveregn bond prices

Jan-11 May-11

Sep-11

Source: Deutsche Bank, Ecowin

Foreign Exchange

Deutsche Bank AG/London All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 146/04/2011.

8 December 2011

FX Strategy Weekly

G10 FX Outlook
Waiting For European Policymakers While there has been much focus on the sustainability of Italy and Spain in recent months, a more pernicious risk has started to be more openly discussed, the possibility of a Euro-area break-up. Our view has always been that such an outcome would have dire global systemic implications (see Exchange Rate Perspectives; December 2010). Indeed, our base case remains that such an outcome will not materialize. A somewhat crude and imperfect measure of assessing the markets pricing of a partial euro break-up would be to compare how Greek government bonds issued under English law (ie euro bonds) are trading relative to those issued under Greek law. In the event of a Greek exit, it would be more straightforward for the Greek government to re-denominate bonds issued under local law than it would under international law. So if the markets do believe in (say) Greek exiting the euro, then Greek sovereign bonds under international law should trade at a premium to local bonds, which has indeed become the case (see first chart). Therefore in addition to steps being taken to help stabilize Italian and Spanish bond markets, such as Thursdays ECB actions and the likely EU summit over the coming weekend, steps must also be taken to reduce the pricing of a Euro-area break-up. The most obvious step that helps stabilize sovereign bonds markets and also reduce potential fiscal transfers between countries would be for the ECB to use its balance sheet more efficiently by aggressively buying Euro-area bonds. This may result in near-term shortcovering in the euro, but such rallies would likely be limited not lease because the euro has started to trade less with risk markets such as the AUD and S&P500. Therefore, the underlying downtrend in the euro would likely continue (see second chart). Looking Back As this is our last FX Strategy Weekly of the year we will be publishing our FX Blueprint for 2012 in the new year, it is interesting to review G10 currency performance over 2011. Amazingly, all currencies, except for JPY, are within 1.5% of where they were at the start of the year. The JPY has rallied by 4.5% against USD, and so has been the only G10 currency that has had a meaningful move. Interestingly, such a narrow divergence of currency performance has occurred despite wide divergences in interest rate moves. For example, Australian 2y yields fell over 150bps in 2011, while Uk 2y yields fell only 20bps, yet the currencies of both has similar moves (see third chart). 2011 will be a lesson on how currency drivers can easily change. Bilal Hafeez
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Market Starting to Price Greek Exit From Euro-Area

40 35 30 25 20 15 10 5 0 -5 -10 -15 Jan-10 May-10 Sep-10
Source: Global Markets Research; Bloomberg Finance LP

points, average of Int'l sovereign (FRN) minus local soveregn bond prices

Greek Int'l Sovereign bonds (English law) trade at premium to Greek local sovereign bonds (Greek law)

Greek Int'l bonds (trade at discount to local sovereign

Jan-11 May-11

Sep-11

EUR TWI Trending Down

112 110 108 106 104 102 100 98 96 94 92 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11

USD TWI EUR TWI

Source: Global Markets Research; Bloomberg Finance LP

Little Change in FX Over 2011 (Except JPY), Despite Large Moves in Interest Rates
5.0%
Change in FX (vs USD) over 2011

JPY

4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -200 -150 -100 -50 0 AU D NZD SEK CAD CHF NOK G BP EU R U SD

Change in 2y over 2011 (bps)

Source: Global Markets Research; Bloomberg Finance LP,

Singapore +65 64237884

Deutsche Bank AG/London

8 December 2011

FX Strategy Weekly

EMEA FX: Gamma positioning update

Gamma positioning is lighter across the board in EMEA FX Current gamma positioning is not prohibitive to our view - USD/TRY to stay in the 1.70-1.90 range in the near term Unwind of long vol positions going into year end combined with the moderation in implied vols means we could see rebuilding of long vol positions going into January The first takeaway from the positioning update is that positions are by and large lighter when compared 2 or 3 weeks ago. This can be seen in one of two ways - the first is that the outright magnitude of positions is smaller (this week there are virtually no +/- 4 or 5 positions) and secondly that market makers are now slightly long gamma - reflective of unwinding their earlier long positions. In USD/TRY Market Makers are short gamma above 1.90 suggesting upward pressures if we are to break this level. Positioning also suggests that spot is likely to be 'sticky' at levels around 1.80, as evidenced by the fact that market makers are long gamma by the magnitude of +2. Finally, no significant gamma position exists at strikes below 1.80. All in all this suggests that movements in USD/TRY spot is not likely to be driven by gamma positioning. As a reminder to our readers - we expect the lira to be broadly range-bound between 1.70 and 1.90. The upside in USD/TRY will be limited by CBT intervention/policy and expectations that the CA adjustment will become more visible in the coming months due to domestic demand weakening and loan growth deceleration. At the same time the downside in USD/TRY should be confined to around 1.70 - reflecting that downside risks to growth have increased but also that any narrowing of the C/A deficit is likely to be gradual and from high levels. EMEA FX - ZAR and CE-3 in particular - have been among the worst hit currencies in all of EMFX this year. CE-3 has been hit primarily for its close ties to Europe and mediocre carry/vol, while it seems the rand has been the default risk on/off currency for much of the year. In all of HUF, PLN and ZAR, market makers are now long gamma at strikes close to spot and around 2-4% north of spot. The moderation in implied vols since late November/start of December combined with a lightening up of gamma positioning suggests investors could start rebuilding paid positions with market makers going into January. Henrik Gullberg, London, +44 207 54 59847 Siddharth Kapoor, London, +44 207 54 74241

Positioning in EMEA

Gamma positioning in EMEA FX -4% -3% -2% -1% Spot 1% 2% 3% 4% EURPLN -1 EURHUF -1 USDZAR -2 USDRUB -1 0 0 0 0 0 0 0 0 0 0 0 -1 1 1 0 0 0 0 1 0 0 0 0 0 2 1 0 -1 0 0 2 0

Note: +5 = max long gamma; -5 = max short gamma

Source: DB Global Markets Research, Bloomberg.

Turkey : Current Account Balance and Total Loand

175 150 125 Percent 100 75 50 25 0 07 08 09 10 11 12 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 USD (billions)

Turkey, C/A balance (inverted) Turkey, Credit, Total loans, YoY

Source: DB Global Markets Research, dbSelect.

Deutsche Bank AG/London

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8 December 2011

FX Strategy Weekly

LatAm FX: Main views and trade recommendations

We present our main views recommendations for LatAm FX. and strategy

ARS: No more freebies

USD mm 20,000 15,000 10,000 5,000 0 -5,000 -10,000 -15,000 -20,000 -25,000 -30,000 Jan-07
(1) Freely Available Reserves (2) = (1) - Reserve Requirements USD Deposits (3) = (2) - BCRA Bills

We recommend maintaining exposure to MXN by switching to short CAD/MXN and to position for a temporary retracement in BRL with zero-cost 1M USD/BRL put spreads. We also recommend maintaining short EUR/CLP and long USD/PEN. We remain constructive on COP with a medium term perspective, but recommend avoiding exposure as we approach the usually complicated end of the year. We remain bearish on the ARS but the NDF curve has already incorporated enough depreciation at longer maturities. Nevertheless, some investors may find attractive receiving carry in the short-end of the curve.

Jan-08

Jan-09

Jan-10

Jan-11

Source: Deutsche Bank. Note: As of 11/30/2011, latest available date.

Brazil
Potential for short-term retracement. The BRL as other liquid EM currencies- has suffered from increased volatility on the back of developments in core markets. This has favored our long 1M FVA position, which has reached its target. The better tone in risk sentiment after the coordinated action by main central banks, and the potential intervention of the Central Bank of Brazil (BCB) in the FX market, could help BRL to recover. However, behind the short-term overshooting, the currency is still overvalued from a more fundamental perspective. Additionally, carry is expected to decrease further as the central bank continues easing monetary conditions aggressively with a focus on economic activity. Moreover, both the trade balance and current account are expected to deteriorate amid a reduction in FDI flows. As a consequence, we recommend positioning for potential short-term retracement with zero-cost 1x2 USD/BRL put spreads, but maintaining a neutral stance at longer horizons.

Argentina
Managing a difficult trade-off. The pressure on the currency continues to increase but the central bank seems engaged in avoiding any meaningful depreciation. Amid increasing volatility in global financial markets, the ARS has weakened approximately 1% per month during the last 2 months. In our view, the government will find increasingly difficult to continue with this strategy due to the combination of worrisome levels of capital flight and double digit inflation. Additionally, the bleeding of international reserves has accelerated after the implementation of the latest FX measures. The freely available reserves -those in excess of the monetary base at the current exchange rate- have now disappeared. If the government insists in using the central bank as financing source, the pressures in the currency will continue to mount. Nevertheless, the NFD curve is already pricing a depreciation of 30% in 12M, which might be excessive. Due to elevated risks and low liquidity we recommend avoiding exposure to this curve, but some investors may find attractive the elevated carry in the front-end (1M offers 31% implied yield versus 3% depreciation).

Chile
At the tone of global growth. During next year, the CLP will continue to be affected by the continuous revisions of expectations regarding global growth and copper prices. A soft landing of China and the finalization of the rule-based intervention could benefit the CLP and counteract the potential setback from reduction in carry due to monetary easing. The main short-term risks are related to the direct and indirect effects of a potential escalation in the European crisis. We recommend maintaining a short EUR/CLP position (entry: 690, target: 660, stop: 685)

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Deutsche Bank AG/London

8 December 2011

FX Strategy Weekly

CLP: The cyclical driver

700 650 600 6000 550 8000 500 450 400 Jan 07 10000
USD/CLP Copper prices, rhs (inverse)

2000

4000

unless the currency appreciates considerably. We continue to find attractive maintaining exposure to the peso, even when acknowledging the potential risks posed by the external environment. We recommend taking profits in our long MXNCZK recommendation and switching to short CADMXN (entry: 13.38, target: 13.10, stop: 13.50); this cross still offers some positive carry while offering protection against US risks.

MXN: Intervention may reduce volatility

12000 Jan 08 Jan 09 Jan 10 Jan 11

Source: Deutsche Bank

Colombia
Constructive on fundamentals but beware of shortterm risks. Fundamentals keeps improving the mediumterm prospects for the COP, but the usual end-of-year scarcity of USD in the local market create some pressure on short-term points, increasing the volatility during the next weeks. The favorable trade and fiscal performance observed during this year is expected to continue during 2012, and strong FDI flows will more than compensate a growing deficit in the current account. The latest activity and inflation data suggest that Banrep will continue to tighten monetary conditions early into next year. Together with lean positioning, the recovery in carry could act as important short-term driver. Nevertheless, the recent underperformance of the COP is a reminder that the currency could also suffer from a more challenging global environment, particularly as technical factors play a role at the turn of the year. As a consequence, we recommend remaining on the sidelines, waiting for better entry levels at the beginning of next year.

Peru
Risks are biased toward depreciation. The successful Central Bank intervention in the FX market has shielded the PEN from the recent volatility in global financial markets. However, as the currency continues to trade close to multiyear high levels, the intervention has helped to increase the currency overvaluation. While the central bank will likely continue to intervene aggressively to smooth the currency movements and capital flows may still be favorable, the risks, in our view, are biased toward depreciation. Next year, the currency will receive less support both from economic growth and terms of trade. We recommend maintaining 3M USD/PEN NDF (entry: 2.72, target: 2.80, stop: 2.68).

Mexico
Policy mix may reduce currency volatility. MXN was one of the currencies which suffered the most from recent market volatility. Nevertheless, the recently announced rule-based intervention by Banxico (will offer USD400mm whenever the currency weakens by more than 2% in a day) was successful in curbing the MXN depreciation and may help to reduce its volatility. The effectiveness of the intervention could be increased due to the important MXN undervaluation and extreme short positioning MXN is clearly undervalued both from a shortterm perspective based in recent evolution of financial drivers and from a much longer valuation based on macroeconomic fundamentals. Additionally, in our view it will be difficult that Banxico eases monetary conditions
Deutsche Bank AG/London

Mauro Roca, New York, +1 (212) 250 8609

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8 December 2011

FX Strategy Weekly

Appendix 1
Important Disclosures Additional information available upon request
For disclosures pertaining to recommendations or estimates made on a security mentioned in this report, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr.

Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. George Saravelos/Henrik Gullberg/Mauro Roca/Dennis Tan/Bilal Hafeez/John Horner

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Deutsche Bank AG/London

8 December 2011

FX Strategy Weekly

Regulatory Disclosures 1. Important Additional Conflict Disclosures

Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

2. Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.

3. Country-Specific Disclosures
Australia and New Zealand: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively. Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) and its(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is indirectly affected by revenues deriving from the business and financial transactions of Deutsche Bank. EU countries: Disclosures relating to our obligations under MiFiD can be found at http://www.globalmarkets.db.com/riskdisclosures. Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, Type II Financial Instruments Firms Association, The Financial Futures Association of Japan. Commissions and risks involved in stock transactions - for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange fluctuations. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in Japan unless Japan is specifically designated in the name of the entity. Malaysia: Deutsche Bank AG and/or its affiliate(s) may maintain positions in the securities referred to herein and may from time to time offer those securities for purchase or may have an interest to purchase such securities. Deutsche Bank may engage in transactions in a manner inconsistent with the views discussed herein. Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation.

Risks to Fixed Income Positions

Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise to pay fixed or variable interest rates. For an investor that is long fixed rate instruments (thus receiving these cash flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation (including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), and settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates these are common in emerging markets. It is important to note that the index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It is also important to acknowledge that funding in a currency that differs from the currency in which the coupons to be received are denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options in addition to the risks related to rates movements.

Deutsche Bank AG/London

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David Folkerts-Landau
Managing Director Global Head of Research Stuart Parkinson Associate Director Company Research Europe Guy Ashton Regional Head Asia-Pacific Fergus Lynch Regional Head Marcel Cassard Global Head Fixed Income Research Germany Andreas Neubauer Regional Head Americas Steve Pollard Regional Head

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