EFTA01458987

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