12 January 2016 FX Blueprint: Forever Young Theme #9: Asian provocateur Buy USD vs TVVD, KRW and THB Investors should diversity their focus from external vulnerabilities in EM (current account deficits, reserves, foreign ownership) to include internal vulnerabilities (output gaps, domestic indebtedness). As the fed hikes, rate differentials will narrow more in internally vulnerable EM markets. THB, 7WD, KRW & CNY stand out as the shorts to capture this theme in Asia. For global FX investors, Asia has arguably been a place to hide in recent years. On average, current account positions in Asia are healthier; the beta to the USD has been significantly lower; and FX volatility much lesser than other regions (Chart 1. top half). Admittedly, there is large infra-Asian heterogeneity, with the likes of Malaysia and Indonesia hardly subscribing to these favorable characteristics. But on average, Asian currencies can be said to have been less externally vu€nerable than her EM and even G10 peers. However, when shifting focus to internal vulnerabilities - such as output gaps. domestic' indebtedness, and demographks ;hit .)rctiire ni; knnocl !,;(4H, ,i; for Asia. The slowdown in growth in Asia, measured by the 10 year z-score of 2016 growth forecasts, is second worst to Latin America. Importantly though, unlike Latam, where central banks are still expected to hike rates along with the Fed this year, Asian central banks remain biased to ease further (Chart 1, bottom half). Asia is the only region where policy rates on average will be coming down. This will be led by cuts in China, Indonesia, and India, but with the risk that other economies performing below potential also feel compelled to ease Interestingly, the performance of average Asian HEEHs has tracked the growth 'advantage' of Asia over developed markets very tightly in the past (Chart 2). The recent correction in Asian REERs is consistent with a 'catch-down' to the narrower gap between Asian and DM growth, as Asia has slowed and developed markets picked up some pace. But, the Asian FX adjustment appears incomplete, with room for more weakness before the slower growth reality is fully priced in. In EM crises. thc, c),t t. fermi vulnerabilitie‘t;: current account deficits, foreign ownership of domestic securities, USD denominated external debt, commodity exposure. and reserves coverage, amongst others. Indeed, these have been the differentiating metrics for EM FX for the past few years. In Asia. the two currencies which show up on the rear end of these metrics are Indonesia and Malaysia. Reserves coverage for short-term external debt is the poorest (Chart 3), foreign ownership of local currency government bonds the highest at 39% and 47% respectively, and current accounts are most exposed to lower energy prices. These vulnerabilities will keep IDR and MYR most liable to weaken during times of risk !External vs. internal vulnerabilities: Asia scores highly ion the former, but increasingly poorly on the latter yam I a USO TVI:t Axon GDh 000 420 400 ci IMMW **** 40) 460 .1.00 I I Ate 010 &WA ulam As* tam RCA 010 040 tee 2-scraeot3:553 GOPGtoton 020 a 020 2o 040 to 003 o 020 All Il. I to 403 fctactai !tato Ch.v.po 2016 opal -20 GiO °AEA Al. Later, Lawn BACA G10 be Na We coAla It amps escitaptft Twofers co ant exam grant. NW wester te axateltenso co I a ION Sant Dana* gat Ilaanteg taws LI! WC Asia 9. 8 6 5 3 2 of 01 02 hdjusting to slower growth reality - more to go —Asia I'M Growth Geo le Average) - R:En AS); I el. YoY % 03 04 05 06 07 06 09 10 11 12 13 14 15 Savor 0•40cher far* CPC St Aker AmPoir• 7% IMYR and IDR are still at the rear end on almost all !external vulnerability metrics 5 3 2 0 pti Resersiscomforshortainsexismeldebt KRW CIt. ma Soon* dawns Bank CEIC ¶WD INA IDA PAR Deutsche Bank AG/London Page 19 CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0120339 CONFIDENTIAL SDNY_GM_00266523 EFTA01459705