EFTA Document EFTA01459035

1 December 2015 Special Report: Euroglut a year on: alive and kicking, EUWUSD to break parity even clearer how pivotal fixed income outflows have been for the Eurozone's basic balance. I Figure 5: Bond outflows still close to summer peak, while equity inflows have abated for good &rims. Noma Net esty inflows mos Net debt inflows EUR bn eo 60 so -10 -80 2008 Figure 6.. Norwesidents" divestitures increasingly important, but ultimate asset ownership is murky 3mrn a EMV residents 60 ]EUR ce • 40 —Net bald inflows -80 2009 2010 2011 2012 2013 2014 2015 2006 2009 2010 SOW* Ong+. Bo* 81.10000)FiviTY IF S Nonresidents 2011 2012 2013 2014 2015 Sasee 0evklu'aink. litittwergnu, 00 LP A recent criticism of the Euroglut thesis is that foreign divestitures now account for a greater share of net bond outflows than European purchases abroad, seemingly inconsistent with our hypothesis of a European saving glut. The attribution of ultimate asset ownership is murky, however. While we show below that Americans have likely started to divest European bonds, we suspect that sales of euro area assets held in the UK and other offshore centres are in part attributable to euro area residents. Do the portfolio flow changes in the euro area financial account matter for the exchange rate? Plotting EURNSD against the smoothed basic balance would suggest so. More specifically in response to the Fed's second argument, if exchange rates adjusted to policy changes such as QE instantaneously, the euro should not have trended with such persistence over the past year (figure 7). Indeed, following the euro's momentum has been one of the best performing currency strategies this year, as shown by the excess returns on our DBCR index [Fiore 7: EU WUSD has tracked the baste balance closely 1.6 1.6 1.4 1.3 12 11 1 2010 2011 2012 2013 2014 2015 2009 —EUR/USD —basic balance S.‘tor Onria:N, ark. l'4,oroirp FM4 t• (figure 8). Page 4 3m sum 350 EUR bn f 300 250 200 roc 160 100 156 so 0 Figure 8: St.te;es, of cello:writ) euro moinem um shows lexchanpe rate adjustment not instantaneous tut on back of [Flows: -150 -200 1 170 165 160 • 145 • 140 2010 2011 —DB Ctsrency Momentum Excess Rants 2012 2013 201:. Sans 0.~4$.0, Exoon6r 'Naar LP Deutsche Bank AG/London CONFIDENTIAL — PURSUANT TO FED. R CRIM. P. 6(e) CONFIDENTIAL DB-SDNY-0119237 SDNY_GM_00265421 EFTA01459035