EFTA Document EFTA01449343

16 May 2013 FX Blueprint: Dashing Buck Theme 41: Green Back The dollar is the top performing currency in G10 so far this year, and not far from the top if emerging market currencies are included. Therefore, dollar strength has not been confined to just the yen (see first chart), which suggests a broader dollar uptrend is unfolding. The fact that the consensus of analysts is only looking for moderate dollar strength against the majors and weakness against the rest of GIO and EM add to the case that we are only at the early stages of dollar strength. Equity Flows Still Not Supportive Ironically, dollar strength has so far not been supported by foreign inflows into US equity markets, despite US outperformance. The US saw negligible equity inflows in QI, with the Euro-area seeing by far the largest. Both Japan, and the rest of Asia also saw larger inflows (see second chart). Flows often lag performance, so one would not necessarily expect flows to immediately pick up into the US with stronger US markets, but the resilience of the dollar does augur well for a dollar uptrend. China Wildcard Yet the equity flow picture has not been the most surprising flow story of 2013. Instead, the significant increase in Chinese FX reserves takes that prize. Reserve accumulation has been at the highest pace since 2011, and undoubtedly has provided much support to currencies such as the euro and Australian dollar through a rebalancing effect. The backdrop of weak growth and strong credit expansion has provided an unusual mix for such a pace of accumulation. It would appear that some inflows to China have occurred through over-invoicing of exports and onshore entities taking advantage of the carry offered by borrowing in dollars and lending in Chinese rates. However, over the past week, new measures have been introduced to clamp on these practices. This should slow the pace of reserve accumulation. Moreover, the sharp decline in the USD/CNY fix over April has also likely added to inflows. USD/CNY continues to trade at the bottom of the band around the fix, which implies still significant CM' demand. However, this state-of-affairs is unlikely to continue not least because the much anticipated band widening may actually occur over the coming months, and bring to an end anticipatory inflows. Stepping back, what is evident is that US equity markets have been outperforming since 2009, but the dollar has only started to gain traction since late 2011. The 1995 dollar turn also saw US equity Deutsche Bank AG/London 77 75 73 71 - 69 - 67 - FedUSDINNI USD basket vs G10 eivJPY(equatweightec0 65 - l --r Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sans oar. a.. - . . . - . . . . - . . . . - . . . . - . . . . - . . . . - . . . . - . . . . - . . . - . . . . - . . . - . . . . - . . . - Figure 2: Equity Flows To Everywhere But US so 70 so 60 40 30 20 10 0 -10 $ba, estimated foral forEuro-oreo Euro 1201 1202 1203 1204 1301 Scow Owe?* art Japan Asia tenth Figure 3: China Reserves Flays Surged In 2013 350 300 250 I 200 150 100 OC: s Chma ISS0) • ncl China tSbni 0301 0303 1001 10(13 1 101 1103 1201 1203 13O1 5otont 0a4W.* Page 3 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0 104710 CONFIDENTIAL SDNY_GM_00250894 EFTA01449343