28 February 2013 Exchange Rate Perspectives Deutsche Bank Figure 17: BoJ Balance Sheet Yet To Grow As Fast As Fed Or ECB 35% central bank balance sheet as share of GOP 30% 25% 20% 10% 5% 0% 00 Fed Sco,:•!. C!"..9!!!et‘r... 02 04 06 OB 10 12 Figure 18: Japan's Narrow Basic Balance of Payments Very Negative 20 15 10 5 90 100 ^:to 20 130 140 ~BobBVnu12Nsun 150 uSttiltY (non .5 160 4en91 JanS4 Jan97 Jan00 Jan-33 Jan.36 Jan-39 Jan-12 CNY, EUR, JPY and the rest: Where Next? The case for yen weakness is straightforward. We expect "Abenomics" to see a more aggressive BoJ, perhaps using the 1930s as a template for recovery, when currency weakness was a clear support (see FX Strategy Weekty, 15 February, 2013). It should noted that the BoJ has yet to expand its balance sheet as much as the Fed or the ECB since 2008 (see Figure 17). The Bank of England also appears to be itching to ease policy in part to weaken the pound, perhaps in response to Abenomics. Outside of BoJ policy, the narrow basic balance of payments (current account + FDl) points to clear yen weakness (see Figure 18). The surge in money market funds inflows should also reverse (see chart). We expect USD/JPY to eventually rise to 115 by 2015 (and 100 by year-end and 110 by end-2014). These are higher than our previous forecasts. The negative growth gap with the US, similar interest rates (see Figure 19) and US investors buying less equities abroad should weigh on the euro. The ECB is unlikely to hike with Euroarea growth close to 0% and with BoJ and BoE actions leading to currency weakness. And of course, there are ongoing and well-known issues around the Euro-area crisis. We look for the euro to eventually head to 1.10 by 2015 (and 1.20 by year-end and 1.15 by end-2014). Figure 19: US/Euro Rate Spreads Sideways 1.45 - 0.91- 01-. "Si o.4: -0 5; r Detrencsed USD vs EUFepre-99 DEM, Ilis1 2y fate ditt ensl 8 4 2 \1 \ 44il l fiV4 -4 -1.05 - -6 73 76 79 82 85 88 91 94 97 00 03 06 09 12 Page IC Figure 20. CNY Under- and Over Valued 20 10 -10 -20 CNYayervaluaben based on FEM (dock) and BEER (grey) CNY overvalued -30 return to 10/ wool current iFEEPI -40 --- PPP adjusted lor productivity and terms of vale SEER 96 97 98 98 99 00 01 02 03 04 05 06 07 08 09 09 10 11 12 Deutsche Bank AG/London CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) CONFIDENTIAL DB-SDNY-0104598 SDNY_GM_00250782 EFTA01449261