EFTA Document EFTA01446661

9 January 2014 FX Blueprint: Thin end of the wedge Theme 1t4: - Swiss NOK'd-out We can think of three reasons to go short CHF/N0K. 1. The relative cycle is supportive of rate differentials. Inflation is at a much higher starting point in Norway than in Switzerland, leaving the Norges Bank much less room to manoeuvre than the SNB in the event of upside surprises to import prices or stronger European growth. Market pricing in Norway has evolved rapidly from three months ago, with the first hike now expected in 03 2015 rather than 01 2014, more or less in line with the Norges' own projections. N0K is also much better placed to benefit from a stronger US cycle with one of the strongest correlations to US growth, and CHF one of the weakest. One risk is house prices, which have risen precipitately in Norway over the last five years, a sharp reversal of which could weigh on domestic demand and prompt Norges' dovishness. We think the risks of this are slim, however, (see theme #6). and moderate falls will be welcomed by the central bank as skimming froth from the market. 2. Swiss safe-haven unwind should follow Norway's. Like Switzerland, Norway experienced large-scale safe haven inflows as a consequence of the financial crisis, helping to pause customary current account surplus recycling. In the latter's case, these inflows have largely reversed, to the tune of N0K 190bn on a 2y/2y basis). This has been one of the primary recent drags on the krone, but appears to have largely run its course, in contrast to Switzerland where it has yet to begin. 3. CHF also more vulnerable to domestic outflows. As well as the foreign inflow, Norway and Switzerland both saw significant repatriation of domestic assets from abroad. Again, this flow has long turned in Norway but not yet in Switzerland. One possible catalyst will be stronger price pressures next year on the back of more robust growth. This should erode real returns Swiss domestics have enjoyed on already some of the most expensive assets in the world. Historically, Swiss capital flows have been counter-cyclically related to prices (chart 3). Indeed, CHF performance closely tracked changes in real yields last year. By contrast, while conventional Norwegian outflows have resumed, N0K is more protected by surplus savings being invested by the oil fund. Along with the above, CHF/NOK appears fundamentally misaligned with traditional drivers like oil/gold. Finally, the trade benefits from being USD and EUR/USD neutral (with a 15 year correlation of 16% and -11% respectively). Harvey, 1.OnCloa 4-14(291754 51947 N0K one of highest betas to US cycle, CHF lowest af.,' • FX conelations to quarterly US GDP AJI Al I. • ' COP CAD EUR Ce.c -Pv 5040t• dandy Sri, SA)Yrito•e &Wt.* LP 'Norway flow reversal nearly done, Swiss yet to begin 10% ••••44coewipv. MI catto4po Rant %00P 5% . s5entioelsed. Mt podloba Rows .15 '30% -35% 10% 5% 0% -5% -10% -15% -20% -25% -40% 1 L .30% Jan-99 Aug.03 Ku .02 Ott-00 May-06 Doc-05 .1,4-06 Firb40 %p11 &one Daditr Bank ilibiAbstp RAW* LP iMare Swiss inflation means CHF weakness 40.0.0 Pcrlota 033 94,%4 Ch ma 44030 4,34c03 Jr4? Ao3 0) Mel.02 Oct-03 lAst05 Or-06 A.105 Sono Coatoots font ibeete% Retencs Deutsche Bank AG/London Page 9 CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) CONFIDENTIAL SDNY_GM_00247142 DB-SDNY-0 100958 EFTA01446661