FX Forecasts and Valuations

Transcription

1 Deutsche Bank Markets Research Global Foreign Exchange FX Date 5 December 2014 FX Forecasts and Valuations vision Alan Ruskin Strategist (+1) alan.ruskin@db.com George Saravelos Strategist (+44) george.saravelos@db.com 2014 has been a year where the USD has proved that it can still rally when US risk appetite and stocks improve and US yields move lower, not traditionally a USD positive environment. How far the USD has come in breaking old correlations, is one indication of how far it can go when the higher rates story finally kicks into gear. Main forecast changes include: USD/JPY end 2015 and 2016 were revised on Nov 10 th when spot was trading below Y115 to Y125 and Y130 respectively). AUD/USD at end-2015 is now seen at 0.78 helped along by our new call that the RBA will cut rates 50bps next year. Two months ago, our inaugural edition of the bi-monthly FX forecasts and valuation publication was titled long-term overshoot. At the time USD/JPY was trading between Y107 and Y108, and our Y120 end 2015 was considered aggressive. USD/JPY at Y107 was already straddling the fringes of the 20% band above PPP that has been a good indicator of valuation extremes, and eventual reversals. USD/JPY is now ~30% above our PPP measure, taking it to extremes not seen for over 30 years! Does this scream imminent turnaround? No. The conditions for a turn require a change of regime that plays against the yen s role as the preeminent funder and more specific to Japan, evidence from the export sector that the yen is cheap and that it is combining with cheap oil such that JPY FEER measures confirm BEER and PPP undervaluation signals. In the meantime, the extreme yen valuations are likely to mean that over the next two years the yen slowly loses its current starring role, as the leading edge of a multi-year USD upswing, but still participates in USD strength. Table 1: G10 FX Forecasts USD-crosses Q Q Q Q EUR/USD USD/JPY GBP/USD USD/CHF AUD/USD NZD/USD USD/CAD USD/SEK USD/NOK EUR-crosses Q Q Q Q EUR/JPY EUR/GBP EUR/CHF EUR/SEK EUR/NOK Source: Deutsche Bank DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 148/04/2014.

2 End of 2015 and 2016 USD/JPY forecasts were revised to Y125 and Y130 respectively on 10th Nov. when USD/JPY was still trading below Y115, and we are first to admit that even as aggressive JPY bears we are struggling to stay ahead of spot! As fast as USD/JPY has accelerated to the upside in recent weeks, EUR/USD s downside momentum has shown a propensity to stall, at least until the November US payrolls. The immediate impact of portfolio reallocation related to negative rates has likely taken place and looking ahead, ECB QE in Q is already mostly priced in. The EUR then remains a conundrum for forecasters to the extent that it never seems to be quite as weak as the fundamentals suggest. The large narrow basic balance surplus continues to act as a brake, in notable contrast to the tailwinds provided by Japan s narrow basic balance deficit. While the signal effect of ECB QE will not surprise, the portfolio displacement impact related to ECB balance sheet expansion has hardly begun, and will remain a prominent and growing EUR negative factor. The EUR/USD end of 2015 forecast then remains at As for the broader USD story, it continues to resemble some of the characteristics of the late 1990s inclusive of US asset inflation versus global commodities disinflation - encouraging of continued US economy outperformance versus almost all DM and EM countries in Terms of trade allied to oil prices also largely explain most the relative value trades in the past two months, notably in the EM world. We anticipate that in the next two months before the next FX forecasts and valuations report, global risk appetite will remain resolute, largely buoyed by the benefits of softer energy prices, providing opportunities for tactical relative value trades, but not strategic carry trades. While the price action in 2015 has played out in many of the ways we predicted, it would be disingenuous to say the DB FX team has had it all our own way. Much more than we had expected of the USD gains in H have relied on EUR weakness, led by negative rates, and then JPY weakness induced by another bout of BOJ easing augmented by the GPIF. The good news for USD bulls like ourselves is this: The market now only prices in a modest 150bps of Fed tightening through the end of 2016, over 25bps down from the start of the year. The slide in USD yields across the curve, has left greater potential for US rates to finally contribute to USD strength in the year ahead. At a minimum, 2014 has been a year where the USD has proved that it can still rally when US risk appetite and stocks improve and US yields move lower, not traditionally a USD positive environment. How far the USD has come in breaking old correlations, is one indication of how far it can go. Page 2

3 EM Currency & Policy forecasts Table 2: Asia FX and policy rate forecasts FX forecasts Policy rate forecasts Ccy Q Q Q Q Current Q Q Q China USD/CNY Hong Kong USD/HKD India USD/INR Indonesia USD/IDR Malaysia USD/MYR Philippines USD/PHP Singapore USD/SGD South Korea USD/KRW Taiwan USD/TWD Thailand USD/THB Source: Deutsche Bank Table 3: EMEA FX and policy rate forecasts FX forecasts Policy rate forecasts Ccy Q Q Q Q Current Q Q Q Czech Rep. EUR/CZK USD/CZK Hungary EUR/HUF USD/HUF Poland EUR/PLN USD/PLN Russia USD/RUB Turkey USD/TRY South Africa USD/ZAR Source: Deutsche Bank Table 4: Latin America FX and policy rate forecasts FX forecasts Policy rate forecasts Ccy Q Q Q Q Current Q Q Q Argentina USD/ARS Brazil USD/BRL Chile USD/CLP Colombia USD/COP Mexico USD/MXN Source: Deutsche Bank ** Emerging Market FX and policy rate forecasts are provided by Deutsche Bank s Regional Economics teams. Page 3

4 FX Views G10 Views Euro Our forecasts for EUR/USD remain unchanged into year-end and beyond. Near-term we see risks that the recent EUR/USD drop takes a pause, with market positioning very extended, real yield fair value still in the high 0s, and ECB expectations running ahead of what was delivered this Thursday. Going out to next year, we see more downside to the currency with the risks being skewed to greater, rather than lesser weakness. First, ECB QE remains our baseline most likely delivered in January. The intended effects are likely to be larger and more protracted than equivalently-sized policies in the US or Japan due to the presence of negative rates. Second, we expect Fed rate lift-off to materialize over the course of H2, with the dollar historically showing a strong appreciating trend into the first central bank rate hike. Finally, we believe next year will mark the beginning of broader capital flow shifts into the US fuelled by persistent growth and increasing monetary policy divergence. Japan Announcements of QQE2 by the BoJ and reallocation by the GPIF on Oct 31 strongly confirmed the acceleration and sustainability of USD/JPY s uptrend. The expected victory of the Prime Minister Abe-led coalition in the Lower House election on Dec 14 will further reinforce the rise of USD/JPY and Nikkei under Abe-nomics. The US economy is a main driver of USD/JPY higher and is expected to keep growing at +3%. We see USD/JPY reaching 125 by end-2014 and 130 by end While the recent rapid rally of USD/JPY will have to correct at some point, it will be firmly supported by Japanese investors buying-on-dips and importers who have not secured sufficient amounts of USD yet. United Kingdom The pound should perform well against the euro heading into year-end. The UK is one of the preferred destinations for European investors so should benefit from portfolio inflows on the back of low European yields. ECB QE would accelerate this trend. Positioning is light and monetary policy expectations have fallen back considerably, with the market not pricing the first Bank of England hike until October 2015, after the Fed. Risks associated with slowing growth and a worsening fiscal outlook should not materialize until next year Switzerland The outlook for the Swiss franc remains bearish. The case for the SNB to cut the deposit rate to negative at the December meeting has risen considerably after recent market pressure on the floor and with further ECB easing around the corner. A precarious inflation backdrop (CPI forecasts are likely to be revised lower again at the meeting) also militates for further monetary action. This is irrespective of the result of the gold referendum. A cut to negative should have a significant impact on the currency due to the extremely large amount of excess liquidity in the monetary system relative to GDP. Canada Our forecast remains a slow grind higher in USD/CAD to 0 by end-2015 and 5 by end-2016 as this low beta cross gets pulled along by higher US rates and lower oil prices. The Bank of Canada recently acknowledged that stronger Canadian growth likely closed the output gap and wage inflation may soon follow a much lower unemployment rate. We forecast the BoC to hike in Q along with the Fed but not match their pace, with carry in USD/CAD all but disappearing by end Sharper depreciation would likely require oil prices to fall further below oil sands breakevens. Australia and New Zealand The medium-term picture is negative for AUD/USD, with the rate spread narrowing as US yields rise and the RBA cuts interest rates, and the trend decline in Australia's terms of trade expected to continue over coming years. Over the second half of 2014, lower commodity prices and a less hawkish outlook for official interest rates have seen the NZD decline, though the exchange rate remains above long-run average levels supported by high relative interest rates. A narrowing interest rate spread as US yields rise should see NZD/USD fall further over the medium term. Page 4

5 Norway The sell-off in NOK morning is being driven by lower crude yes, but maybe more importantly the fact that rates are also drifting lower, with NOK FRAs now priced for around 35bp of further rate cuts over the next 6-9 months. For Norges Bank it is a question to what extent a decline in off-shore investment activity is impacting on the mainland economy over time. Another key input variable into the Bank's policy thinking is the exchange rate, which currently is 5% below the Bank's projection. So while lower interest rates are weighing on the NOK, the same krone depreciation is then also reducing the need to implement or carry out the expected rate cuts. Disentangling the circularity of all this for the NOK is not entirely straight-forward, but until we get some further clarification on Norges Bank thinking on lower crude vis-a-vis a weaker krone, NOK will trade as a proxy for crude. Bearish. Sweden Fighting lower supply inflation with rates is likely to be inefficient and like Riksbank governor Ingves has pointed out on several occasions, could also jeopardise financial sector stability. The bottom line, focus has shifted away to some extent from CPI to short-term growth indicators, although a dip in economic data and/or a further contraction in CPI could change that. For now though, growth is stable, CPI stuck at low levels, and policy hence unlikely to be much of a driver of FX near-term. EUR/SEK locked into a range. Asia China For RMB, following the earlier than expected easing announced by PBoC in November, we think (1) the need to use the RMB as a monetary tool will start waning; and (2) the steep CNH forward curve will flatten. As we have mentioned before, China has been using the RMB as a monetary tool to manage onshore liquidity, in particular to limit capital outflows. However, using the currency as a monetary tool is increasingly counter-productive since (1) RMB appreciation adds to the dis-inflationary pressure China is facing; and (2) reducing China export competiveness adds to the downside pressure on growth. With the government now willing to use its traditional monetary policy tool i.e. policy rates, we do not think there is need for RMB to appreciate any further. In fact, China we feel could start to gradually weaken the RMB, given that it is already very expensive on a REER basis and dis-inflationary pressure is picking up India India is one of the biggest winners from lower oil prices, benefiting from a large positive terms-of-trade shock, a falling subsidy bill, and a welcome boost in her fight against inflation. We find that every $10 reduction in oil prices could improve the trade deficit by over 1% of GDP. The relief from lower oil has allowed India to lift gold import restrictions. India's domestic story remains positive, with BJP's strong performance in recent state elections likely to help accelerate economic reforms. We are keenly watching the outcome of the ongoing Winter Parliament session, and the disinvestment schedule with stake sales expected to begin soon. FDI inflows have been encouraging, equity flows could rise as RBI begins its easing cycle, and debt limit expansion remains on the table, albeit at RBI's discretion and pace. RBI will likely continue to absorb USD inflows, but with reserves regaining their pre-crisis peak, intervention intensity has become more balanced on both sides. We are positive on INR (against SGD). The biggest risk is that REER appreciation begins to bite and leads RBI to encourage an greater upward adjustment in USD/INR. Indonesia We believe the combination of the drop in global oil prices, and the bold domestic fuel price hike, could herald a turn in Indonesia's oil trade deficit. In all, we see a potential improvement of 1-% of GDP in the current account on the back of this. Bank Indonesia is keeping policy tight, and surprised with a hike this month. FX valuations have largely adjusted and capped global long-end bond yields help. We are watching the Golkar leadership succession closely, as they could influence parliamentary arithmetic. We are constructive on the IDR. However, constraints to IDR performance could be BI intervention, should they look to build back reserves, and/or a step up in corporate hedging demand. We would change our positive view on a break above in spot. Page 5

6 Korea Despite the recent strong equity inflows and the sizable current account surplus, we think these trends are running out of steam. First, the 12 month rolling sum of the current account surplus has started to turn, due to the slowdown in global demand, particularly from China. Second, the low yield environment in the onshore market has also resulted in domestic investors becoming more active in investing aboard. The currency policy of the authorities remains a key driver of the weaker KRW. Given the weakness in the domestic economy and competition from a weaker Yen, the Korean authorities have become more active of late in weakening the Won, as suggested by the increase in FX reserves. With the growing pressure on BoK to cut policy rates, possibly as early as December/ January, we believe it would be incongruous for the authorities to permit the currency to strengthen at a time when the bias is leaning towards supporting the economy. Malaysia We have been dedicated USD/MYR bulls, looking for a move higher to The recent collapse in oil prices has catalyzed the breakout higher, but other fundamentals are also worrying. MYR is one of the most portfolio flow dependent currencies in the region and offshore interest appears to be structurally falling. A meager $3bn of offshore inflows were received in 2014, compared to $15-25bn per year during Debt flow substitution to higher yield markets, and saturation of offshore holdings (already at 50% of the MGS market) could be factors. The trade surplus is entirely commodity supported, and expectations of domestic tightening are no longer a supportive factor for the MYR. The positive fiscal trend of subsidy rationalization, is being mitigated by declining oil revenues. We stay long USD/MYR till 3.50, a level which is consistent with a complete adjustment to Malaysia's weakened basic balance position. Philippines Into the end of the year, the PHP will likely outperform. Exports growth has been surprisingly strong, the remittance season will bring large, concentrated inflows, and central bank resistance at 45 is skewing the risk-reward. However, beyond that, we believe the structural "good EM" story on PHP is likely in the past. Portfolio and other investment outflows have been a source of strain, suggesting a reversal of prior dramatic inflows. Real yields are the lowest in the region, and PHP is still one of the most overvalued currencies in Asia. The reform & credit re-rating story has stalled. Monetary tightening has ended for now with growth and inflation both softening. Singapore MAS kept a 2% p.a. appreciation bias at their October meeting, citing sticky core inflation. This is not however much insulation for USD/SGD in a USD ascendant world. The strength in the USD has been the catalyst for a break higher, but large SGD overvaluation and softness in exports and property have enabled the move. The next leg up in spot could come from SGD NEER trading towards the bottom end of the policy band, which would equate to a "de facto" easing by MAS. If core inflation softens in the coming months, MAS might even reduce the slope next year. We expect a continued slow grind higher in USD/SGD, with sensitivity to the moves in the majors. Taiwan Despite expectation of further improvement in growth, we remain bearish on TWD. With the Fed starting to signal a change in monetary policy stance, the divergence in monetary policy between the CBC and Fed and ongoing purchasing of foreign assets by Lifers, the risk for USD/TWD is tilted towards the upside. More importantly, CBC is unlikely to slow the weakness given (1) the weakness in JPY and KRW, (2) benign inflation outlook and (3) fragile export recovery. We would expect TWD to continue to underperform its regional peers. Thailand The coup induced cap on political risk premium, large foreign underweights on Thai assets, BoT support for the THB, and import compression have helped THB outperform in this latest USD move. However these factors could turn less favorable. Foreigners do not appear keen to return. Economic revival looks dependent on fiscal stimulus, and projects could potentially raise import demand. The export cycle has been the most disappointing in the region. The central bank may need to cut rates again, or ultimately resort to the currency to ease conditions. Political risk could flare up again next year. Page 6

7 EMEA Israel A poor economic backdrop as witnessed in contracting exports and imports in the Oct trade report, and CPI firmly in negative territory would suggest further ILS depreciation is needed. So far this has been achieved without large scale intervention by the BoI. Bearish. Poland A clear shift in rhetoric from the NBP, with focus now on growth rather than CPI. With growth resilient (PMI, unemployment, etc), this would suggest limited room for further cuts. Also, the FinMin's FX balance stood at almost EUR6bn by end of Oct, and judging by the pattern over the past few years, including last year when the average (not year-end) exchange rates was used, there is room for the FinMin to reduce their currency balance into year-end. With EUR/CHF close to the 0 floor having increased the probability of more aggressive SNB intervention, we prefer to express long PLN vs CHF. Russia So far verbal intervention, rate hike, and FX liquidity support have not been sufficient to stabilise RUB. As long as sanctions are in place, domestic players are likely to maintain a preference for USDs (rather than sell export revenues). Bearish. South Africa Strong seasonal support (travel receipts rising towards year-end), signs manufacturing output picking up, inflation moderating and a cautious SARB are all currency constructive. Having said that, with a very poor domestic backdrop, SA relies heavily on a sustained global upturn. Neutral. Turkey The C/A balance is improving in response to lower energy prices. The CBT is 'committed' to lowering the CPI, and draining liquidity to cap USD/TRY is one of their tools. We stay long TRY on the crosses (long TRY/ILS from EMM on Oct 9th). Hungary Commercial banks agreeing to buy all the FX required for the conversion of the FX loan stock from the NBH removed one big potential negative for the HUF. Also, a solid domestic backdrop means the NBH is less incentivised to continue cutting rates. At the same time, with growth picking up very only gradually this is unlikely to translate into policy normalisation anytime soon due to external disinflation and still significant slack in the domestic economy. EUR/HUF to remain in a range. Czech Republic Robust economic activity data and inflation ticking up gradually has reduced the need for the CNB to raise the EUR/CZK floor. At the same time inflation remains very subdued, so also no incentive to let go of floor. Latin America Brazil The BRL continues to be a hostage of the political backdrop in Brazil. While the announcement of a fiscally conservative FinMin (and reported planned fiscal and monetary tightening) are in principle supportive the currency, risks regarding policy implementations and the perils of floating (the BCB has been signaling towards tapering of the FX swaps program), as well as the dim internal economic outlook and continuing weakness in commodities continue to weigh on the performance of one of the highest yielding currencies in the world. We expect the BRL to remain range bound in the next 3/6 months (2.50/2.75). After that, BRL performance will be a function of not only appetite for EM risk but further clarity on the mix of policies chosen by the current administration, and on. Page 7

8 Mexico Re-pricing of the front end of Mexico together with continuing oil weakness has weighed heavily on the MXN, which is approaching the 14 mark vs. USD. We believe that the current sell-off is exaggerated, as we do not see the drop in oil as too worrisome for the Mexican economy or for MXN. Concerns have been raised regarding the effects of the fall in oil prices on the viability of deep water oil production projects that are part of the energy reform, but we do not see a significant change in the outlook for those, for now. Furthermore, we still expect reforms-related inflows to materialize, as well as US growth spillovers. Speculative positioning is also at multi-year highs (short MXN). Altogether, we expect some retracement in MXN, followed by range-bound trading, with a positive bias. We continue to like MXN vs. CE3 currencies as a proxy for dollar strength. George Saravelos London, +44 (20) Alan Ruskin New York, +1 (212) Taisake Tanaka Tokyo, +81-(3) Mallika Sachdeva Singapore, Henrik Gullberg London, +44 (20) Oliver Harvey London, +44 (20) Tim Jordan Sydney, +61 (2) Assaf Schtauber New York, +1 (212) Sameer Goel Singapore, Perry Kojodjojo Hong Kong, Daniel Brehon New York, +1 (212) Page 8

9 G10 FX Valuation Monitor: Lines in the Sand* Figure 1: The euro is expensive and the dollar cheap Figure 2: The dollar is close to fair value now (% Over/undervalued) USDTWI PPP USDTWI NZD AUD CHF GBP CAD EUR USD NOK SEK JPY Figure 3: EUR/USD: The euro is expensive though remains within the 20% threshold Figure 4: USD/JPY: The yen is more than 30% cheap to its fair value EUR/USD PPP EUR/USD USD/JPY PPP USD/JPY Figure 5: USD/GBP: GBP remains expensive Figure 6: USD/CHF: as well as CHF USD/GBP USD/CHF PPP USD/CHF PPP USD/GBP Page 9

10 Figure 7: USD/CAD: CAD overvaluation is being unwound Figure 8: USD/AUD: AUD is very expensive, and still beyond 20% threshold USD/CAD 0.9 PPP USD/CAD USD/AUD 0.9 PPP USD/AUD 0.9 Figure 9: USD/NZD:.and so is NZD Figure 10: EUR/JPY: The euro is very expensive against the yen EUR/JPY PPP EUR/JPY USD/NZD PPP USD/NZD Figure 11: EUR/GBP: Sterling is close to its fair value against the euro Figure 12: EUR/SEK: SEK is very cheap versus the euro EUR/GBP EUR/SEK PPP EUR/GBP 4 PPP EUR/SEK Page 10

11 Figure 13: EUR/CHF: CHF is expensive against the euro Figure 14: EUR/CAD: CAD is close its fair value against EUR EUR/CHF PPP EUR/CHF EUR/CAD 0.9 PPP EUR/CAD Figure 15: AUD/NZD: NZD is slightly expensive against AUD. Figure 16: CAD/NZD: and very expensive against CAD AUD/NZD PPP AUD/NZD CAD/NZD 20% band PPP CAD/NZD Figure 17: JPY/NZD: NZD is extremely expensive against the yen Figure 18: GBP/JPY: JPY is very cheap against GBP JPY/NZD PPPJPY/NZD GBP/JPY PPP GBP/JPY Page 11

12 NZD AUD CHF HKD CAD SGD MXN EUR PHP THB ILS TWD MYR GBP TRY KRW CNY CZK HUF BRL IDR NOK INR ZAR PLN COP CLP SEK JPY RUB ARS 5 December 2014 FX Behavioral and Fundamental Equilibrium Exchange Rates (BEER and FEER)* Figure 1: USD-cross BEER and FEER valuations, TWI PPP valuations BEER FEER REER vs 10y average Figure 2: EUR/USD is expensive vs. BEER FV Figure 3: USD/JPY is now above fair value vs. BEER FV EUR JPY Figure 4: GBP/USD is coming closer to its fair value Figure 5: USD BIS TWI is close to its fair value 2.5 GBP Page 12

13 .Figure 6: USD/CAD is now close its fair value vs. BEER FV Figure 7: AUD/USD is expensive vs. BEER FV CAD AUD 0.4 Figure 8: NZD/USD is very expensive vs. BEER FV Figure 9: USD/CHF is quite cheap vs. BEER FV NZD 3.0 CHF Source: Deutsche Bank Figure 10: USD/NOK is expensive vs. BEER FV Figure 11: USD/SEK is expensive vs. BEER FV 10.0 NOK 1 SEK Page 13

14 Figure 12: EUR/USD is cheap vs. FEER FV Figure 13: USD/JPY is cheap vs. FEER FV EUR JPY Figure 14: GBP/USD is expensive vs. FEER FV Figure 15: USD BIS TWI is very cheap vs. FEER FV 3.0 GBP Figure 16: USD/CAD is cheap than its. FEER FV Figure 17: AUD/USD is cheaper than vs. FEER FV CAD AUD 0.4 Page 14

15 Figure 18: NZD/USD is cheap vs. FEER FV Figure 19: USD/ CHF is expensive vs. FEER FV NZD 3.0 CHF Figure 20: USD/NOK expensive than FEER FV Figure 21: USD/SEK is close to its FEER FV 10.0 NOK 1 SEK Page 15

16 Appendix 1 Important Disclosures Additional information available upon request For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at 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. Alan Ruskin Page 16

17 (a) Regulatory Disclosures (b) 1. Important Additional Conflict Disclosures Aside from within this report, important conflict disclosures can also be found at under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. (c) 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 (d) 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. In cases where at least one Brazil based analyst (identified by a phone number starting with +55 country code) has taken part in the preparation of this research report, the Brazil based analyst whose name appears first assumes primary responsibility for its content from a Brazilian regulatory perspective and for its compliance with CVM Instruction # 483. EU countries: Disclosures relating to our obligations under MiFiD can be found at 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 Member of associations: JSDA, Type II Financial Instruments Firms Association, The Financial Futures Association of Japan, Japan Investment Advisers Association. This report is not meant to solicit the purchase of specific financial instruments or related services. We may charge commissions and fees for certain categories of investment advice, products and services. Recommended investment strategies, products and services carry the risk of losses to principal and other losses as a result of changes in market and/or economic trends, and/or fluctuations in market value. Before deciding on the purchase of financial products and/or services, customers should carefully read the relevant disclosures, prospectuses and other documentation. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in Japan unless "Japan" or "Nippon" 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. Qatar: Deutsche Bank AG in the Qatar Financial Centre (registered no ) is regulated by the Qatar Financial Centre Regulatory Authority. Deutsche Bank AG - QFC Branch may only undertake the financial services activities that fall within the scope of its existing QFCRA license. Principal place of business in the QFC: Qatar Financial Centre, Tower, West Bay, Level 5, PO Box 14928, Doha, Qatar. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available to Business Customers, as defined by the Qatar Financial Centre Regulatory Authority. 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. Kingdom of Saudi Arabia: Deutsche Securities Saudi Arabia LLC Company, (registered no ) is regulated by the Capital Market Authority. Deutsche Securities Saudi Arabia may only undertake the financial services activities that fall within the scope of its existing CMA license. Principal place of business in Saudi Arabia: King Fahad Road, Al Olaya District, P.O. Box , Faisaliah Tower - 17th Floor, Riyadh, Saudi Arabia. United Arab Emirates: Deutsche Bank AG in the Dubai International Financial Centre (registered no ) is regulated by the Dubai Financial Services Authority. Deutsche Bank AG - DIFC Branch may only undertake the financial services activities that fall within the scope of its existing DFSA license. Principal place of business in the DIFC: Dubai International Financial Centre, The Gate Village, Building 5, PO Box , Dubai, U.A.E. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available to Professional Clients, as defined by the Dubai Financial Services Authority. Page 17

18 (e) 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. Page 18

19 David Folkerts-Landau Group Chief Economist Member of the Group Executive Committee Raj Hindocha Global Chief Operating Officer Research Marcel Cassard Global Head FICC Research & Global Macro Economics Richard Smith and Steve Pollard Co-Global Heads Equity Research Michael Spencer Regional Head Asia Pacific Research Ralf Hoffmann Regional Head Deutsche Bank Research, Germany Andreas Neubauer Regional Head Equity Research, Germany Steve Pollard Regional Head Americas Research International Locations Deutsche Bank AG Deutsche Bank Place Level 16 Corner of Hunter & Phillip Streets Sydney, NSW 2000 Australia Tel: (61) Deutsche Bank AG Große Gallusstraße Frankfurt am Main Germany Tel: (49) Deutsche Bank AG Filiale Hongkong International Commerce Centre, 1 Austin Road West,Kowloon, Hong Kong Tel: (852) Deutsche Securities Inc Nagatacho Sanno Park Tower Chiyoda-ku, Tokyo Japan Tel: (81) Deutsche Bank AG London 1 Great Winchester Street London EC2N 2EQ United Kingdom Tel: (44) Wall Street New York, NY United States of America Tel: (1) Global Disclaimer The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively "Deutsche Bank"). 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