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Global

8 December 2011

FX Strategy Weekly

Deutsche Bank AG/London

All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from loca

exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche

Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firmmay have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single

factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.

MICA(P) 146/04/2011.

Market Update

Research Team

LondonCaroline Grady

Henrik Gullberg

Caio Natividade

George SaravelosLamine Bougueroua

Siddharth Kapoor

Kaifeng Chen

New YorkAlan Ruskin

Drausio Giacomelli

Daniel Brehon

Mauro Roca

Guiherme Marone

SingaporeBilal Hafeez

Dennis Tan

Sameer Goel

SydneyJohn Horner

Head of FX StrategyBilal Hafeez

Macro

GlobalMarketsResea

rch

Fore

ignExchange

G10: While there has been much focus on the sustainability of Italy and Spain

in recent months, a more pernicious risk has started to be more openly

discussed, the possibility of a Euro-area break-up. Our view has always been

that such an outcome would have dire global systemic implications (see

Exchange Rate Perspectives; December 2010). Indeed, our base case

remains that such an outcome will not materialize.

EMEA:Gamma positioning is lighter across the board in EMEA FX. Currentgamma positioning is not prohibitive to our view - USD/TRY to stay in the

1.70-1.90 range in the near term. Unwind of long vol positions going into year

end - combined with the moderation in implied vols - means we could see

rebuilding of long vol positions going into January.

LatAm: We present our main views and strategy recommendations for LatAm

FX. We recommend maintaining exposure to MXN by switching to shortCAD/MXN and to position for a temporary retracement in BRL with zero-cost

1M USD/BRL put spreads. We also recommend maintaining short EUR/CLP

and long USD/PEN. We remain constructive on COP with a medium term

perspective, but recommend avoiding exposure as we approach the usually

complicated end of the year. We remain bearish on the ARS but the NDF

curve has already incorporated enough depreciation at longer maturities.

Nevertheless, some investors may find attractive receiving carry in the short-

end of the curve.

Market Starting to Price Greek Exit From Euro-Area

-15

-10

-5

0

5

10

15

20

25

3035

40

Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11

points, average of Int'l sovereign (FRN) minus local

soveregn bond prices

Greek Int' l Sovereign bonds (English law) trade

at premium to Greek local sovereign bonds (Greek law)

Greek Int'l bonds (trade

at discount to local sovereign

Source: Deutsche Bank, Ecowin

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8 December 2011 FX Strategy Weekly

Page 2 Deutsche Bank AG/London

G10 FX OutlookWaiting For European Policymakers

While there has been much focus on the sustainability of

Italy and Spain in recent months, a more pernicious risk

has started to be more openly discussed, the possibility of

a Euro-area break-up. Our view has always been that such

an outcome would have dire global systemic implications

(see Exchange Rate Perspectives; December 2010).

Indeed, our base case remains that such an outcome will

not materialize. A somewhat crude and imperfect

measure of assessing the markets pricing of a partial euro

break-up would be to compare how Greek government

bonds issued under English law (ie euro bonds) are

trading relative to those issued under Greek law. In the

event of a Greek exit, it would be more straightforward for

the Greek government to re-denominate bonds issued

under local law than it would under international law. So if

the markets do believe in (say) Greek exiting the euro,then Greek sovereign bonds under international law

should trade at a premium to local bonds, which has

indeed become the case (see first chart). Therefore in

addition to steps being taken to help stabilize Italian and

Spanish bond markets, such as Thursdays ECB actions

and the likely EU summit over the coming weekend, steps

must also be taken to reduce the pricing of a Euro-area

break-up.

The most obvious step that helps stabilize sovereign

bonds markets and also reduce potential fiscal transfers

between countries would be for the ECB to use its

balance sheet more efficiently by aggressively buying

Euro-area bonds. This may result in near-term short-

covering in the euro, but such rallies would likely be

limited not lease because the euro has started to trade

less with risk markets such as the AUD and S&P500.

Therefore, the underlying downtrend in the euro would

likely continue (see second chart).

Looking Back

As this is our last FX Strategy Weekly of the year we will

be publishing our FX Blueprint for 2012 in the new year, it

is interesting to review G10 currency performance over

2011. Amazingly, all currencies, except for JPY, are within1.5% of where they were at the start of the year. The JPY

has rallied by 4.5% against USD, and so has been the only

G10 currency that has had a meaningful move.

Interestingly, such a narrow divergence of currency

performance has occurred despite wide divergences in

interest rate moves. For example, Australian 2y yields fell

over 150bps in 2011, while Uk 2y yields fell only 20bps,

yet the currencies of both has similar moves (see third

chart). 2011 will be a lesson on how currency drivers can

easily change.

Bilal Hafeez Singapore +65 64237884

EUR TWI Trending Down

92

94

96

98

100

102

104

106

108

110

112


USD TWI

EUR TWI

Source: Global Markets Research; Bloomberg Finance LP

Market Starting to Price Greek Exit From Euro-Area

-15

-10

-5

0

5

10

15

20

25

30

35

40


points, average of Int'l sovereign (FRN) minus local

soveregn bond prices

Greek Int' l Sovereign bonds (English law) trade

at premium to Greek local sovereign bonds (Greek law)

Greek Int'l bonds (trade

at discount to local sovereign

Source: Global Markets Research; Bloomberg Finance LP

Little Change in FX Over 2011 (Except JPY), Despite

Large Moves in Interest Rates

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

-200 -150 -100 -50 0

NZDAU DNOK

CAD

GBP

JPY

CHF

EU RSEK

Change in 2y over 2011 (bps)

ChangeinFX(vsUSD)over2011

U SD

Source: Global Markets Research; Bloomberg Finance LP,

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Deutsche Bank AG/London Page 3

EMEA FX: Gamma positioning update

Gamma positioning is lighter across the board in

EMEA FX

Current gamma positioning is not prohibitive to our

view - USD/TRY to stay in the 1.70-1.90 range in thenear term

Unwind of long vol positions going into year end -

combined with the moderation in implied vols means

we could see rebuilding of long vol positions going

into January

The first takeaway from the positioning update is that

positions are by and large lighter when compared 2 or 3

weeks ago. This can be seen in one of two ways - the first

is that the outright magnitude of positions is smaller (this

week there are virtually no +/- 4 or 5 positions) and

secondly that market makers are now slightly long gamma

- reflective of unwinding their earlier long positions.

In USD/TRY Market Makers are short gamma above 1.90 -

suggesting upward pressures if we are to break this level.

Positioning also suggests that spot is likely to be 'sticky'

at levels around 1.80, as evidenced by the fact that market

makers are long gamma by the magnitude of +2. Finally,

no significant gamma position exists at strikes below

1.80. All in all this suggests that movements in USD/TRY

spot is not likely to be driven by gamma positioning. As a

reminder to our readers - we expect the lira to be broadly

range-bound between 1.70 and 1.90. The upside in

USD/TRY will be limited by CBT intervention/policy and

expectations that the CA adjustment will become more

visible in the coming months due to domestic demand

weakening and loan growth deceleration. At the same

time the downside in USD/TRY should be confined to

around 1.70 - reflecting that downside risks to growth

have increased but also that any narrowing of the C/A

deficit is likely to be gradual and from high levels.

EMEA FX - ZAR and CE-3 in particular - have been among

the worst hit currencies in all of EMFX this year. CE-3 has

been hit primarily for its close ties to Europe and mediocre

carry/vol, while it seems the rand has been the default risk

on/off currency for much of the year. In all of HUF, PLN

and ZAR, market makers are now long gamma at strikes

close to spot and around 2-4% north of spot. Themoderation in implied vols since late November/start of

December combined with a lightening up of gamma

positioning suggests investors could start rebuilding paid

positions with market makers going into January.

Henrik Gullberg, London, +44 207 54 59847

Siddharth Kapoor, London, +44 207 54 74241

Positioning in EMEA

Gamma positioning in EMEA FX

-4% -3% -2% -1% Spot 1% 2% 3% 4%

EURPLN -1 0 0 0 1 0 0 2 0

EURHUF -1 0 0 0 1 0 0 1 0

USDZAR -2 0 0 0 0 1 0 0 2

USDRUB -1 0 0 -1 0 0 0 -1 0

Note: +5 = max long gamma; -5 = max short gammaSource: DB Global Markets Research, Bloomberg.

Turkey : Current Account Balance and Total Loand

Turkey, C/A balance (inverted)Turkey, Credit, Total loans, YoY

07 08 09 10 11 12

USD(

billions)

-10

-9

-8

-7

-6

-5

-4

-3

-2

-1

0

1

Percent

0

25

50

75

100

125

150

175

Source: DB Global Markets Research, dbSelect.

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LatAm FX: Main views and trade

recommendations

We present our main views and strategy

recommendations for LatAm FX.

We recommend maintaining exposure to MXN by

switching to short CAD/MXN and to position for a

temporary retracement in BRL with zero-cost 1M

USD/BRL put spreads.

We also recommend maintaining short EUR/CLP and

long USD/PEN.

We remain constructive on COP with a medium term

perspective, but recommend avoiding exposure as

we approach the usually complicated end of the year.

We remain bearish on the ARS but the NDF curve

has already incorporated enough depreciation at

longer maturities. Nevertheless, some investors mayfind attractive receiving carry in the short-end of the

curve.

Argentina

Managing a difficult trade-off. The pressure on the

currency continues to increase but the central bank seems

engaged in avoiding any meaningful depreciation. Amid

increasing volatility in global financial markets, the ARS

has weakened approximately 1% per month during the

last 2 months. In our view, the government will find

increasingly difficult to continue with this strategy due to

the combination of worrisome levels of capital flight anddouble digit inflation. Additionally, the bleeding of

international reserves has accelerated after the

implementation of the latest FX measures. The freely

available reserves -those in excess of the monetary base

at the current exchange rate- have now disappeared. If the

government insists in using the central bank as financing

source, the pressures in the currency will continue to

mount. Nevertheless, the NFD curve is already pricing a

depreciation of 30% in 12M, which might be excessive.

Due to elevated risks and low liquidity we recommend

avoiding exposure to this curve, but some investors may

find attractive the elevated carry in the front-end (1M

offers 31% implied yield versus 3% depreciation).

ARS: No more freebies

-30,000

-25,000

-20,000

-15,000

-10,000

-5,000

0

5,000

10,000

15,000

20,000

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

(1) Freely Available Reserves

(2) = (1) - Reserve Requirements USD Deposits

(3) = (2) - BCRA Bills

USD mm

Source: Deutsche Bank. Note: As of 11/30/2011, latest available date.

BrazilPotential for short-term retracement. The BRL as

other liquid EM currencies- has suffered from increased

volatility on the back of developments in core markets.

This has favored our long 1M FVA position, which has

reached its target. The better tone in risk sentiment after

the coordinated action by main central banks, and the

potential intervention of the Central Bank of Brazil (BCB) in

the FX market, could help BRL to recover. However,

behind the short-term overshooting, the currency is still

overvalued from a more fundamental perspective.

Additionally, carry is expected to decrease further as the

central bank continues easing monetary conditionsaggressively with a focus on economic activity. Moreover,

both the trade balance and current account are expected

to deteriorate amid a reduction in FDI flows. As a

consequence, we recommend positioning for potential

short-term retracement with zero-cost 1x2 USD/BRL put

spreads, but maintaining a neutral stance at longer

horizons.

Chile

At the tone of global growth. During next year, the CLP

will continue to be affected by the continuous revisions ofexpectations regarding global growth and copper prices. A

soft landing of China and the finalization of the rule-based

intervention could benefit the CLP and counteract the

potential setback from reduction in carry due to monetary

easing. The main short-term risks are related to the direct

and indirect effects of a potential escalation in the

European crisis. We recommend maintaining a short

EUR/CLP position (entry: 690, target: 660, stop: 685)

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CLP: The cyclical driver

2000

4000

6000

8000

10000

12000400

450

500

550

600

650

700

Jan 07 Jan 08 Jan 09 Jan 10 Jan 11

USD/CLP Copper prices, rhs (inverse)

Source: Deutsche Bank

Colombia

Constructive on fundamentals but beware of short-

term risks. Fundamentals keeps improving the medium-

term prospects for the COP, but the usual end-of-year

scarcity of USD in the local market create some pressure

on short-term points, increasing the volatility during the

next weeks. The favorable trade and fiscal performance

observed during this year is expected to continue during

2012, and strong FDI flows will more than compensate a

growing deficit in the current account. The latest activity

and inflation data suggest that Banrep will continue to

tighten monetary conditions early into next year. Together

with lean positioning, the recovery in carry could act as

important short-term driver. Nevertheless, the recent

underperformance of the COP is a reminder that the

currency could also suffer from a more challenging global

environment, particularly as technical factors play a role at

the turn of the year. As a consequence, we recommend

remaining on the sidelines, waiting for better entry levels

at the beginning of next year.

Mexico

Policy mix may reduce currency volatility. MXN was

one of the currencies which suffered the most fromrecent market volatility. Nevertheless, the recently

announced rule-based intervention by Banxico (will offer

USD400mm whenever the currency weakens by more

than 2% in a day) was successful in curbing the MXN

depreciation and may help to reduce its volatility. The

effectiveness of the intervention could be increased due

to the important MXN undervaluation and extreme short

positioning MXN is clearly undervalued both from a short-

term perspective based in recent evolution of financial

drivers and from a much longer valuation based on

macroeconomic fundamentals. Additionally, in our view it

will be difficult that Banxico eases monetary conditions

unless the currency appreciates considerably. We

continue to find attractive maintaining exposure to the

peso, even when acknowledging the potential risks posed

by the external environment. We recommend taking

profits in our long MXNCZK recommendation and

switching to short CADMXN (entry: 13.38, target: 13.10,

stop: 13.50); this cross still offers some positive carry

while offering protection against US risks.

MXN: Intervention may reduce volatility

Peru

Risks are biased toward depreciation. The successful

Central Bank intervention in the FX market has shieldedthe PEN from the recent volatility in global financial

markets. However, as the currency continues to trade

close to multiyear high levels, the intervention has helped

to increase the currency overvaluation. While the central

bank will likely continue to intervene aggressively to

smooth the currency movements and capital flows may

still be favorable, the risks, in our view, are biased toward

depreciation. Next year, the currency will receive less

support both from economic growth and terms of trade.

We recommend maintaining 3M USD/PEN NDF (entry:

2.72, target: 2.80, stop: 2.68).

Mauro Roca, New York, +1 (212) 250 8609

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Appendix 1

Important Disclosures

Additional information available upon requestFor disclosures pertaining to recommendations or estimates made on a security mentioned in this report, please see

the most recently published company report or visit our global disclosure look-up page on our website at

http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr.

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the

undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in

this report. George Saravelos/Henrik Gullberg/Mauro Roca/Dennis Tan/Bilal Hafeez/John Horner

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Regulatory Disclosures

1. Important Additional Conflict Disclosures

Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the

"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

2. Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent

or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at

http://gm.db.com.

3. Country-Specific Disclosures

Australia and New Zealand: This research, and any access to it, is intended only for "wholesale clients" within the meaning ofthe Australian Corporations Act and New Zealand Financial Advisors Act respectively.

Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) andits(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is indirectlyaffected by revenues deriving from the business and financial transactions of Deutsche Bank.

EU countries: Disclosures relating to our obligations under MiFiD can be found athttp://www.globalmarkets.db.com/riskdisclosures.

Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registrationnumber - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117.

Member of associations: JSDA, Type II Financial Instruments Firms Association, The Financial Futures Association of Japan.

Commissions and risks involved in stock transactions - for stock transactions, we charge stock commissions and consumption

tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to

losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses

stemming from foreign exchange fluctuations. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not

registered credit rating agencies in Japan unless Japan is specifically designated in the name of the entity.

Malaysia: Deutsche Bank AG and/or its affiliate(s) may maintain positions in the securities referred to herein and may fromtime to time offer those securities for purchase or may have an interest to purchase such securities. Deutsche Bank may

engage in transactions in a manner inconsistent with the views discussed herein.

Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, anyappraisal or evaluation activity requiring a license in the Russian Federation.

Risks to Fixed Income PositionsMacroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise to pay

fixed or variable interest rates. For an investor that is long fixed rate instruments (thus receiving these cash flows), increases in

interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a loss. The longer the

maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises in

inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse macroeconomic shocks to

receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation (including changes in assets

holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currency

conversion, repatriation of profits and/or the liquidation of positions), and settlement issues related to local clearing houses are

also important risk factors to be considered. The sensitivity of fixed income instruments to macroeconomic shocks may be

mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates these are

common in emerging markets. It is important to note that the index fixings may -- by construction -- lag or mis-measure the

actual move in the underlying variables they are intended to track. The choice of the proper fixing (or metric) is particularly

important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short-dated interest rate

reference index) are exchanged for fixed coupons. It is also important to acknowledge that funding in a currency that differs

from the currency in which the coupons to be received are denominated carries FX risk. Naturally, options on swaps

(swaptions) also bear the risks typical to options in addition to the risks related to rates movements.

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David Folkerts-LandauManaging Director

Global Head of Research

Stuart Parkinson

Associate Director

Company Research

Marcel Cassard

Global Head

Fixed Income Research

Europe Asia-Pacific Germany Americas

Guy Ashton

Regional Head

Fergus Lynch

Regional Head

Andreas Neubauer

Regional Head

Steve Pollard

Regional Head

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