EFTA Document EFTA01386035

16 October 2017 Special Report: Argentina - Position tor the upturn the Egyptian pound, for instance - the peso is already overvalued according to our estimation (chart below). Therefore, while in Egypt monetary authorities can afford to keep the pound stable for months, Argentina's central bank needs to strike a balance between anchoring inflation expectations and preventing excessive overvaluation. The ARS moves ahead of fundamentals 21X, 1RC trc 110 120 100 ARS REEK Ovedlincler Va,.rotco lose Wits Moar., Svonwr ARS! Mot& Mer-00 14.03 Mar'06 Mw 4n Scion Oars,* Sent LEBACs vs. ROFEX: Hovering around the recent highs 28 -**-Imp Rolex Yield 3M 5M 7M 9M -.-Lebac yield 27 1M 2M 28 25 1W 24 23 22 Aug-17 Nov-17 Feb-18 San* Dandy Oa* eloontep May-18 Aug-18 Implied yields also seem too low The chart below shows that the 7M point for example offers almost 340bp of pick up from a hold to maturity perspective. This wide spread suggest that tactical hedges for the peso's "step-function" behavior are relatively inexpensive - a result that extends to floaters. Mar-12 Mr -15 Implied yields: Relatively low bar for tactical hedges This tug-of-war has resulted in USD.A.RS following a "step-function" ascent — with jumps followed by stability - thus boding for tactically managing longs (carry based strategies) The choice of instrument in the short-end is also important given wide dispersion in valuations. LEBACs are the cleanest instruments to express monetary policy views, but they are also short and the least accessible. Fixed-rate BOTEs and floating BOCANs and BOPOMs are accessible, but bear in mind that they also differ in liquidity and fixings so that comparing these instruments has obvious limitations. From a macro standpoint, LEBACs price a small likelihood of further tightening and low supply risk — thus favoring floaters, as we discuss in more details shoilly. The chart bellows shows that the term- structure is flat, while we see room for further tightening. Also, the LEBACs have been used not only as a conduit to implement monetary policy but also for sterilization purposes. Widening CAD and slow reduction in nominal deficits bode for pent-up supply of LEBACs and thus upside risk for these short-end fixed instruments. Deutsche Bank Securities Inc. [ebbe- FX imp!. 7M vs Imp/. 7M:56 vs. bp 26, • 25 24 05 • • •• • • as 23 • • • 4 • 46 • • • • %• 2? • •• • to.• • • • 2t 20 19 • • • 100 200 300 400 500 600 AMP 000101* Fixed or floating rates? A look into valuations We prefer floaters to fixed rate instruments on our macro view and valuation, although the latter is clouded by market segmentation. We use LEBACs as a building ground for valuation despite its limitations because: 1) They are the main instrument to manage local liquidity; 2) They ultimately affect the private floating rate used to fix the BOCANs; and 3) The repo rate used to fix the BOPOM 20s moves in line with the 35-day LEBAC yield Since the LEBAC curve extends to only 9 months we also build on BOTEs in pricing two scenarios for short- Page 3 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) CONFIDENTIAL DB-SDNY-0087562 SDNY_GM_00233746 EFTA01386035