EFTA01359484

3) Absent rate support, sterling much more vulnerable to twin deficits and expensive valuation. A robust recovery and high interest rates relative to European peers has helped to finance a very large deterioration in the UK's current account deficit since 2011. As we have previously argued, much of this is structural; a result of falling profitability in the UK's highly concentrated foreign direct investments dragging on the income balance. If rate support were to fade, slowing foreign capital inflows could see a sharp correction in sterling. Given the prospect of another four years of fiscal tightening, a weaker currency should also be beneficial to the UK's growth mix, which remains geared towards consumption. This makes valuations very unappealing. As my colleague George Saravelos has argued, the pound is now the most expensive currency in the world measured on an average of REER, BEER and FEER valuation metrics. In sum, with a near-term hiking cycle off the table, the rationale for being long sterling has disappeared. Further analysis will need to be undertaken for the future outlook. In the meantime we recommend turning short GBP/USD, which should also benefit from our bearish EUR/USD call. Our GBP/USD forecast for end-2016 and end-2017 is 1.27 and 1.15 respectively. figure I firmewry policy nepriong %Sipe:US GOMM Figure 2 FiVai tutimeing wdi pa up sharply next year dirmislcit In the ',pc asarborq ntras to US • US roes PA* '4 45 • OS CSR /Inca: eicydialessaraa 5rdti inPaa Da.% t•LnF • wt. •• o•-•v• 1 :Clan Saari MI:41? :C4.146 Xnaail &mat: aoaaal ass tioaaark Sossasa:0 erne ONS•S deb l houte 3. UK's My large current ACCOL0I6 deft R. even relative to IstKvi, to beConNa a pt Of:vital Dee?* Pale eor.a4 r'roI *ate% Was aftwa Sa Saha Pawl, Global Currency Valuations WarcPS oraSeaterS .......-- *ASO/ in 4'" w ....0 allialt b oa ti.. :3:1 Co L.< Pos• NCH cc asap eiceeeme IT* .6* 1 lilv M ON „A. fa Lao SIMS su,••••• saw.* • IINSInI14 IMO, ...MS II SM. *eta* kat lastrro..........me to ',ow laskoraia. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0047567 CONFIDENTIAL SDNY GM_00193751 EFTA01359484