EPSTEIN
page 11 / 469 . OCR, unverified
SDNY_GM_00265347
EFTA01458985
--- SOURCE: IMAGES__0084__EFTA01458986.txt ---
METADATA_SOURCE: IMAGES0084
METADATA_FILENAME: EFTA01458986.pdf
----------------------------------------
December 2015
World Outlook 2016: Managing with less liquidity
Figure 3: Banks' P/B relative has not yet reacted to the
Improvement in relative RoEs
—PM relative Ohs)
forward RoE relative (Mel
-10
-20
-30
-40
-50
European banks relative to the market
ui
r,
cs
Z
z
z
Sand awe. an AS
Damen
Page 58
z
z
z
Figure 4: Consumer staples are priced for an implausible
rates trajectory
—
European food & beverage. del to the market Ohs)
—
US 10-year bond yields, inverted (rhs)
220 1
1.3
o
200
1.6
1.9
-1
1.
2.2
180
2.5
2.8
160
3.1
-3
3.4
140 1
3.7
-4
4.0
120 4
4.3
-5
4.6
100
4.9
5.2
5.5
2007
2009
2011
2013
2015
Sows Oftecno &A Anon* Onstreem
Sebastian Raedler, +44 20 754 78169
Wolf-von Rotborg, +44 20 754 52801
Deutsche Bank AG/London
CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e)
CONFIDENTIAL
SDNY_GM_00265349
DB-SDNY-0119165
EFTA01458986
--- SOURCE: IMAGES__0084__EFTA01458987.txt ---
METADATA_SOURCE: IMAGES0084
METADATA_FILENAME: EFTA01458987.pdf
----------------------------------------
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
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
117
•
09.
y7
OK,
105
IN
IN
13?
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