EFTA01459711

12 January 2016 FX Blueprint: Forever Young Theme #14: Volte-face - buy 6m EUR/EM-USD/EM vol spreads, sell EUR vs TRY, MXN, INR • Options markets assume the dollar will drive price action but the euro is now the "risk off" currency • "Euroglut" outflows into the US and EMFX reverse as risk appetite sours and carry trades squeeze • EUR/EM crosses have been realizing well above USD/EM but implied volatilities are quite similar • We recommend buying 6m EUR/EM - USD/EM volatility spreads in TRY, MXN. INR • For a directional view, express our EM 2016 Outlook short EUR v. TRY, MXN and INR trade as a 4m 97.5% worst-of put, a 2/3rd discount v. vanillas UM is the nevz risk appetite barometer Our FX strategy team has written extensively about "Euroglut" outflows into the U.S. and emerging markets (see FX Special Report 9-Dec-14 and 1-Dec-15). EUR increasingly adapts the hallmarks of safe haven currencies such as CHF and JPY; fixed income outflows (Figure 1) followed by sudden repatriation during positioning squeezes. Consequently, correlation between equities (a risk proxy) and EUR/USD has flipped since the Fed-driven USD rally (and ECB QE- driven EUR sell-off) last year. The EUR TWI is now negatively correlated to the S&P 500 while the USD TWI is positively correlated to equities (Figure 2). We can also infer forward-looking market expectations of dollar-equities correlation by comparing implied volatility for USD-hedged and un-hedged international equity ETFs. In recent months fun-hedged) EFA volatility has traded 1-2% below both iShares hedged EFA (HEFA) and DB X-trackers hedged EFA (DBEF), suggesting the market expects the dollar will be positively correlated to global equities in the future (principally with respect to EUR, CHF and JPY). We should expect a similar result when looking for volatility in EMFX. Since EUR/USD is negatively correlated to equities (acting as risk proxy), we would expect EUR to be negative correlated with EMFX as well, making EUR/EM more volatile than USD/EM. Buy EUFflEkl volatility not USDIEM for an added fool. Of Indeed, EUR/EM is realizing higher, but implied volatility is not reflecting this at all. Figure 3 illustrates that EUR/EM and USD/EM 6-month implied volatility is priced roughly equal for much of EMFX, and where it is not (such as INR), the premium on EUR-cross volatility relative to USD-cross volatility is too low. As a result, while USDTRY, USDMXN and USDINR exhibit typically positive volatility risk premiums, EURTRY, EURMXN and EURINR volatility premiums are negative. Deutsche Bank AG/London !Figure 1: Eurozone fixed income outflows dominate the (financial account 1,400 • 1.200 1.00) - 800 900 • 400 200 0 .200 40D 2038 Curnolftive. EUR be a=eValLedon gargaa ImoHaws M1IIP EUR bn Ace zoio 2011 wiz 2013 2014 Totter AnneAs Sr* Ittembevg Mom LP 930 400 903 4,ICO .1.900 -1,500 -1.700 -1.900 -2,100 -7.300 2015 Figure 2: Positive vol premium in USDIEM, negative vol premium in FUR/hi as flight to EIJR safety not priced 2013 2014 Sarno Oadiscar 0a* Illeamlarg Fenno, LP SPX EUR TWI ly corr SPX-USD TWI 1y corr 2015 2016 j Figure 3: Positive vol premium in USD/EM, negative vol !premium in EUR/EM as flight to EUR safety not priced ■ EURTRY • EURMXN ■ EURINR ■ USDTRY ■ USDMXN ■ USDINR 6M Implied Vol 6M Realized Vol 6M Vol Premium Saga O6CO Page 29 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) CONFIDENTIAL SDNY_GM_00266533 DB-SDNY-0120349 EFTA01459711