EFTA01458011

Deutsche Bank Markets Research Global Asset Management: For institutional and registered representative use only. Not for public viewing or distribution. Wealth Management: For client use. Economics Foreign Exchange Rates FX Daily An update to our EUR/USD view (and forget QE, think QT) Our bearish EUR/USD view since last year has relied on two major forces: large-scale European capital outflows (what we have called Euroglut) and the eventual prospect of Fed exit from ultra-accommodative policy. Flow are these two forces lining up as we head into the second half of the year? The European outflow story remains fully on track. Balance of payment data released earlier this week showed another month of strong outflows, bringing European purchases of foreign assets close to all-time record highs. Recent trends matter because they cover the large bund sell-off earlier this year. The data shows that higher bund yields have not triggered a change in European investor behaviour. We are not surprised because the UST-German spread remains very wide and unprecedented bond market volatility has further reduced the risk-adjusted attractiveness of Euro fixed income. We continue to see European outflows as part of a multi-year shift in portfolio allocation behaviour towards foreign assets. What about Fed tightening? The market remains entirely focused on the exact timing of the first rate hike but there are even bigger forces at play. The most important is the Fed's re-investment policy on QE assets, because decisions here will determine the prospect of what would essentially be QT, or quantitative tightening: nearly half a trillion dollars matures in 2016, almost equivalent to a full QE program in reverse. Irrespective of lift-off, the key point then is that Fed tightening is multi-dimensional and likely to steadily reinforce a persistent shift away from the dollar as the world's major funding currency. In sum, we remain bearish EUR/USD and after a Q2 lull accompanied by much lighter investor positioning we expect the weakening trend to resume. We continue to target parity by year-end. lEuroglut continues, despite rise in hund yieklo ebn.3mma 80 - European purchases of foreign bonds and 60 equities 40 20 0 -20 40 -60 -80 Jan-01 Jar Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 record post-crisis, outflows In lark Source Danoto Oak Ofteedfoto _LP Dote 23 July 2015 C6o'(w Sain•PdliXt Strategist (I We all know about QE, but what about QT Monthly fall in Fed balance sheet if re-investment stops Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 -10 I I 1 40 % -20 1 f ' .0 ii US Treasuries 3/4. •... 1 I 1 a.. r . -30 A r I a 4,. tv i -40 -50 LIST - MBS 500bn matunng -60 just in2016 SPecterD•unthe ant. Bloombeg Felence LP on% DB • nowt* Deutsche Bank AG/London DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0117761 CONFIDENTIAL SDNY_GM_00263945 EFTA01458011