EFTA Document EFTA01446660

9 January 2014 FX Blueprint: Thin end of the wedge CAD Flow Picture Very Nega We are more bearish CAD. Speculative shorts are building, but on the portfolio flow side, the balance of payments is characterized by a large overhang of fixed income inflow positions as a by-product of Fed OE (chart 4). Canada benefitted from close to 280bn of "excess" inflows over the 2010-2013, which have plugged a sharply wider current account deficit similar in size to the UK. The UK, in contrast, has suffered from a lack of inflows in recent years (chart 4). While FDI and underweight fixed income positions have the potential to "plug" the UK deficit, the risks appear skewed the other way in Canada. On the monetary policy side, Canada doesn't appear well placed to benefit from an improving US cycle either. Rate expectations are already running ahead of the Fed and BoE by a quarter, and given the BoC's renewed dovishness there is limited potential of these happening sooner. Indeed, the correlation between US and Canadian data surprises has dropped off sharply over the last few years, pointing to the divergent trends in local housing markets and domestic leverage. To boot, Canadian terms of trade have clearly peaked (chart 6), with the currency moderately expensive versus non-energy commodity prices and supply glut in North America oil production providing an additional headwind. Big picture, GBP/CAD is a dollar-neutral cross, with correlations with other USD crosses all lying below 50% over 1-3 year time horizons and zero correlation with the broad USD TWI since 1995. The relative performance between UK financials and Canadian stocks does a decent job of explaining big picture turns since the early 1990s. The cross remains more than 20% below its pre-crisis average suggesting plenty of potential for upside as the respective domestic stories play out. George Sanyolos, London. +44(20) 754 79118 Oliver Hanley, London, +44(20) 754 57947 'GBP/CAD a Beta Neutral Cross 2.6 —GBP/CAD Ohs) —UK fins cialsiTacwo stock index (ihs) 2.6 2.4 2.2 2 1.8 1.6 1.4 93 95 97 99 01 03 05 07 09 Seem Dereicee SW* Page 8 I' 0.9 0.8 L 0.7 0.6 0.5 0.4 r 0.3 0.2 It 13 K Inflows Could Improve. Opposite of Canada 1100 1 1000 "0 800 6 700 500 300 Cumulative bond inflows, local currency, bn (UK) 50bn 1 +280bn (Canada) change elottve to trend 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Settee Greer larlern Sewn& INS 2500 2000 1500 1000 500 1 GBP1CA() 'Current Account Neutral' Cross 10 - Cumnt account deficits., lacy bn 5 Canada 0 -10 . -15 UK -20 90 91 92 93 95 9697%0001 02 03 05 06 07 08 10 11 12 Sourer Draw Sark acerelorep Anew 1USD/CAD Following Commodity Prices Lower 95 97 99 01 03 05 07 09 11 13 0.85 0.95 1.05 1.15 1.25 1.35 1.45 1.55 1.65 35C 30C 25( 20C — USD/CAD (I s. inverted) - BoC Non-energy Commodity Price Index (rhs 5( 50110•' DOCCOM lent deerobeg Awn.* UP Doutscho Bank AG/London CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) CONFIDENTIAL DB-SDNY-0 100957 SDNY_GM_00247141 EFTA01446660