EFTA Document EFTA01451144

9 January 2014 EX Blueprint Thin end of the wedge Theme In: Trend no bitter end In 2007 we replicated a RBA study that claimed non- commercial "profit seekers" made money on their IMM positions at the expense of commercial "liquidity seekers". 3 The striking conclusion is that currency speculators generally know the correct direction of 05 currencies and investors can profit from knowing their positions (although these signals are less useful in practice since IMM data is lagged three days). In a sense, money is "left on the table" by commercial foreign exchange users, and to a lesser extent by foreign bond and equity investors, which can be earned by non-commercial actors that provide liquidity to currency markets. These profit seekers collect FX risk premia in the same manner Keynes first identified when describing risk transfer in commodity markets.' Profit Seekers Made Money in Every Year since 2003 By our calculations, non-commercial positions made money in every year since data was first released in 1993, mainly at the expense of commercial users (dealers also made money).5 In recent years profits have come from timing big EUR/USD moves (2010-11) and catching last year's USD/JPY rise. These P&L numbers more closely resemble pre-crisis profits than the outsize gain in 2008 (reflecting higher FX volatility) and the nearly flat 2009 period (probably due to an unexpected GBP rebound). IS P&L Eroded As Speculators Accumulate Positions? Our analysis rests on the crucial assumption that profit seekers accumulate positions over the course of the week at the average price. By contrast, live trading metrics such as the Parker Index of currency manager returns show a loss since 2011 as currency volatility has overwhelmed macro trends (with the exception of USD/JPY in 2013) even as the correlation between weekly IMM P&L and Parker returns remains positive. It is possible that infra-week volatility causes profit seekers (especially momentum traders) to "buy high and sell low" relative to WVAP and that IMM P&L is eroded when currencies trade in a choppy range. Fortunately for investors FX volatility continues to fall and promising trends (JPY, CAD) have emerged. Daniel Mellon, Now Yor; +7 (2721250 7639 3 See Kearns and Manners 120041 "The profitability of Speculators in Currency Futures Markets-. Reserve Bank of Australia, and Biel Kafeez (2007), "Currency Markets: Is Money Left On the Table?" ' Keynes, J.M. (1930). "Treatise on Money London: Macmillan, We calculate weekly P&L by determining the notional value of positions on Tuesday and assuming longs and shorts are accumulated (or squared) at the average puce over the course of the week Page 14 . . . . - . . . . - . . . . - . . . . - Figure 1: Absolute P&L (Smil) of Profit-Seekers and Liquidity-Seekers Using G5 IMM Data (1993-2013) 19 USD mm (19912013 except euro 1999-2013) allon-Cornmercial/Profrt-seekers ,c, 12 ca cr- 6 3 0 ce to o -12 CommerclaUlletikety-seekers 919495909191910010200‘00007080910111213 &vv., oetac* ant &warn France 1LP Figure 2: Speculators had the correct EUR positions in 2010-I I and a large JPY short in 2013 12 n USD mm (1993-2013. except euro 1999-2013) t 8 M_ t. 0 et 4 o -8 .4)-12 • -16 • Non.commerciali Profit-seekers • Commercial i Liquidity-seekers AUD GBP CAD JPY CHF BA Soso Dostcheao* Stones, Finn* UP Figure 3: The Parker Index of currency manager returns has lagged (MM P&L in recent years despite continued positive correlation between them Average IMM Cum P&L (5100m, Ihs) 45 1 Parker Index ben-2003 o 0, Ihst r 100% ttAM P&L V. Parker (1 im corr.rhs) 40 1 at , 90% 35 I Jr ...„ AA/ - 1- 80% !.., • 70% 1 25 20 I 50% c3-r 15 1 • 40% i 10 4 ..-.. iv F 30% S. .0° ;,..,./.--. r ..-- I 20% 5 • ......: -i. 10% .0 , L ma 03 04 OS 06 07 08 09 10 11 12 13 Son Deux.* Bett frorntrep Rona* UP 30 1 Deutsche Bank AG/London CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) CONFIDENTIAL SDNY_GM_00253571 DB-SDNY-0 107387 EFTA01451144