From: jeffrey E. <jeevacation@gmail.com>
Sent: Thursday, September 10, 2015 8:22 AM
To: Daniel Sabba
Subject: Re: Fw: Gautam:EMEA FX Chartpack: high yielders vs. low yielders divergence [I]

speak later today I am in europe

On Thu, Sep 10, 2015 at 4:4= AM, Daniel Sabba <> wrote:

Classification: For Internal Use Only

Thought provoking charts.

From: Isin Sumengen-Ziel (DEUTSCHE BANK AG, LO) [mailto:=a href="" target="_blank">]
Sent: Wednesday, September 09, 2015 10:09 AM
Subject: Gautam:EMEA FX Chartpack: high yielders vs. low yielders di=ergence

Given the volatile price action i= the EMEA high betas (TRY, RUB, ZAR), the below charts may be informative:=/span>

1) Stretchometer: Price action is certainly s=retched (on the weaker side) across the board, but especially in MYR and B=L. TRY ZAR RUB price action is also stretched, but not as much as before t=e rally over the past two days.

Looking specifically at USDTRY, price action is now =tretched to the extent we saw earlier this year and more importantly at th= start of 2014 (when the CBT undertook an emergency rate hike).

The stretchometer for USDZAR is at 5-yr highs, but h=s retraced somewhat in the last 2 days (in line with the risk-on appreciat=on move observed across the EMEA high-yielders).

USDRUB price action is also stretched, but we are st=ll far below the 'stretch' levels we have seen in the rece=t past.

2) Financial fair value (based on a regression of=spot on S&P, VIX, Crude, CRB, US 10y, DXY, carry):

According to our short term 'financial fair =alue' metric, EM FX is cheap almost across the board, with ZAR bei=g the the most undervalued currency. TRY is also cheap, while RUB less so.=However, these results should be taken with a pinch of salt, as the short-term valuation metric provides a better picture when=currencies are trading within relatively tight ranges, rather than trendin= strongly and breaking new ground (as is the case currently for many EM cu=rencies) due to domestic factors/factors not captured by the model.

Financial fair value (USD crosses):

As the charts below show, the extent of undervaluati=n (i.e. the magnitude of the model residual) is at ly extremes for TRY and=ZAR, but not for RUB.

USDTRY:

USDZAR:

USDRUB:

Another point to highlight from the financial fair v=lue metric, other than the cheapness of TRY and ZAR in particular, is the =esilience of Central Europe (HUF, CZK, PLN, RON). We have been highlightin= our bullish bias on the region (HUF and PIN in particular), and the financial fair value metric corroborates t=e fact that these currencies have been mostly immune to the recent sell-of= in EM FX. They have the best performing EM currencies (vs USD) since the =uan deval. Over this period, there has certainly been differentiation within EMEA — weakening bias in=the high yielders TRY RUB ZAR and resilience in Central Europe fx.

This differentiation is also evident in the chart be=ow, which indicates that the average correlation between the EMEA fx curre=cies (USD crosses) has come down sharply in the past few months.

Best,

Gautam

___________________________=___________________________

Gautam Kalani, Ph.D
Economist/Strategist

Deutsche Bank AG, Filiale London Emerging Markets Research <u>Winchester</u> House, 1 <u>Great Winchester Street, EC2N 2DB London,</u> United Kingdo=

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