EFTA Document EFTA01457319

From: Daniel Sabba Sent: 5/1/2015 10:15:37 AM To: jeffrey E. [jeevacation mail.comj CC: Paul Morris I I; Vahe Ste anian ; Ariane Dwyer Richard Kahn Subject: DB James Malcolm: Are the Bo., shifting stance? Own some cheap optionality Jeffrey — we wanted to share this note with you as it relates to what we perceive to be your macro views. James Malcolm is updating his view on the Sol - he thinks there is now material event risk for the July meeting which warrants some 3-month vol premium on Yen assets and a close following of domestic data and news in the interim. Is the Bill stance shifting from "no-ease-unless-things-worsen" .... to "ease-unless-things improve" mode ? I think it makes a lot of sense to own some low delta, low premium SJPY upside at the moment We are axed to sell 50m$ payout of a 5th August expiry 133.15 One Touch at just 8% (mid 5%) So invest 4m$ upfront to make S0m$ if the level trades at any point during the lifetime of the trade Spot 119.95 Full piece attached below From James Malcolm : Minor tweaks or comments in recent BoJ reports suggest the central bank is becoming more nervous about missing its inflation target a little over two years after it was lifted and a radical new QE program to achieve it was implemented. They suggest that if the economy does not pick up substantial momentum over the next ten weeks additional easing may be warranted. The July 15 monetary policy meeting is key as it provides for an interim assessment of policy board member's price and growth forecasts, and comes just after the Bank's quarterly Tankan and public opinion survey. Beyond the hard data, these will show whether spending intentions and inflation expectations are lifting in response to higher profits and wages absent the consumption-tax drag. What has changed? This week's semiannual Outlook for Economic Activity and Prices report ('The Bank's View') replaced its assessment that "there are downside risks" for prices with the starker phrase that "risks are skewed to the downside." A research study on the impact of QE thus far, published today, concluded that "in order to achieve the price stability target of 2% in a stable manner, a further increase in inflation expectations is necessary." It also said that while the overall results have been broadly in line with expectations "... [the) demand component data for real GDP -- particularly private consumption -- point to considerably weaker improvements than predicted," even if, on the other hand, actual increases in corporate profits and employee income have noticably exceeded expectations. And an empirical regime-switching model that researchers at the Bank have have developed shows that the likelihood of a switch in inflation to a 2% trend remains very low. In fact, it has turned down from about 20% to 10% more recently, while the probability of the trend being at 1% has risen to about 55% from less than 20% pre-2013 (chart below). That is good in so far as the probability of the trend being at zero has dropped from stably more than 80% to less than 30% today, yet that is clearly not something which Mr Kuroda will settle for. For his part, the central bank chief is walking a tightrope. He has conceded his much vaunted original 2-year timeframe will be missed due to inflation, but clearly also feels like he cannot give the government any scope to relax on their medium-term fiscal consolidation plan, as this was an explicit precondition for the conduct and support of extraordinary monetary easing in the first place. It warrants some 3-month vol premium on yen assets and a particularly close following of domestic data and news in the interim. Both mark a sharp shift from what was always likely to be a very quiet 4 or 5 months following last December's election. CONFIDENTIAL — PURSUANT TO FED. R. GRIM. P. 6(e) DB-SDNY-0116821 CONFIDENTIAL SDNY_GM_00263005 EFTA01457319