EFTA01449259

28 February 2013 Exchange Rate Perspectives Deutsche Bank Sxrc.: icc,e.krk Page 8 8,000 -I —'-Developing ex-China Ohs) 6,000 China (rhs) 1 800 700 600 500 • 400 300 200 100 .Figure 9: US Real Yields Turning Up 2 1 0 -1 SUS toy . real yields Ohs) —US unemployment rate, inverted (ms) .. 11 97 98 99 00 01 02 03 04 05 06 07 06 09 10 11 12 13 e 3 I.4 5 ) 6 i• 10 9rx• NOW. Get E:on. Figure 10: Lowest US Real Yields Outside Of Inflation Spikes Since 1800 30 , ,10 yields minus Inflation 1800 1825 1850 1875 1900 1925 1950 1975 2000 did, currency markets are no longer reacting as strongly to such measures. Instead, other central banks are catching up to Fed easing, such as the BoJ since Abe's election (or even earlier the SNB in 2011), are having a distinctly bigger a more negative impact on their currencies over the dollar. Finally, the introduction of the OMT by the ECB in the summer of 2012 has seen the tail risk for the Euro-area significantly reduced. What Goes Up Must Come Down; The Link To China A new market regime would imply that many of the trends since 2008 will likely reverse. Identifying those trends would also help answer the question of what would happen if the Fed exits QE, which has occupied market participants in recent months. At the core, two clear trends have been in play since 2008. First, ultraeasy monetary policy by the central banks of the crisis-hit economies in the developed world, notably the Fed and ECB. Second, emerging market growth outperformance, particularly China. Moreover, both trends are connected. Indeed, Fed easing has seen US real yields, and global liquidity increase, while Chinese growth outperformance has provided a destination for this Figure 11: Surge in China Investment And Non- Conventional Credit 55% 50% 45% 40% 35% Investment share of Chinese GDP Ilhs) % of credit outside of bank Yuan loans (rhs) 60% 50% 10,000 - 40% 30% - 20% 4,000 Figure 12: Cross-Border Banking Lending Going To China 12,000 1 foreign claims on borrowers from ($bn): 10% 2,000 30% r r T --• 0% 0 7881 83 85 8789 91 93 9597 9901 03 0608 10 12 84 85 87 89 91 93 95 97 99 01 03 05 07 08 10 12 E Deutsche Bank AG/London CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) CONFIDENTIAL DB-SDNY-0104596 SDNY_GM_00250780 EFTA01449259