Agenda

Page

4 January 2016

GLOBAL FIXED INCOME MARKETS 2017 OUTLOOK

2017 FX Outlook: Making the dollar good but not great again

Paul MeggyesiManaging Director, Global FX Strategy(44-20) 7134-2714Paul.meggyesi@jpmorgan.com

J.P. Morgan Securities plc

See the end pages of this presentation for analyst certification and important disclosures.

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What happens to markets if and when America’s made great againGlobal macro themes and strategy for 2017

� 1) US fiscal/monetary policy mix

� Strategy: USD longs vs Asia (CNY, KRW and TWD) and EMEA (TRY and PLN)

� 2) US trade protectionism advances from threat to re ality

� Strategy: short CAD vs NOK, short AUD vs JP via 3m-6m calendar spread of one-touch puts, long USD/CNH 3m seagull, long JPY/KRW vs USD/JPY straddles (6m)

� 3) Limits to unconventional policy (Bunds keep pace with UST)

� Strategy: long European FX vs USD bloc (long NOK vs CAD and long SEK vs NZD). Stay short EUR/CZK and EUR/CHF

� 4) Populism bends but doesn't break EMU

� Strategy: short EUR/CHF, long EUR/USD straddles (1Y)

� 5) Oil achieves a higher range up to $60/bbl

� Strategy: long NOK vs EUR and CAD in cash

� 6) Valuation

� Strategy: long SEK vs NZD via 6m put

� 7) Carry

� Strategy: long ARS vs USD (projected 10% total return over 1Y)

Idiosyncratic themes by market for 2017

� EUR/USD and European government bonds : H1 populism, H2 tapering. EUR/USD 2Q 1.06, 4Q 1.15

� JPY: BoJ inaction, but Q4 anxiety before Kuroda’s term ends in April 2018. USD/JPY 2Q 105, 4Q 99

� GBP: Brexit likely sticks to the hard road and growth slows due to high inflation and tighter fiscal policy. EUR/GBP 2Q 0.89, 4Q 0.91

� SEK: An end to the four-year downtrend as there’s an excessive risk premium for an inflation-centric Riksbank. EUR/SEK to 9.65-9.45

� NOK: EUR/NOK to 8.60 as oil hits $60 and double-digit house price inflation warrants higher rates before mid-2019.

� CHF and CZK: tapering/abandonment of FX intervention. EUR/CHF to 1.03; EUR/CZK to 26.0.

� AUD and NZD: rate convergence/crossover on below-target inflation. NZD succumbs to valuation as carry flows no longer fund the c/a deficit. AUD/USD Q1 0.71, 2Q 0.68. NZD/USD 2Q 0.64, 4Q 0.62

� CAD: Largest c/a deficit in nearly 2-decades; BoC downbeat on potential growth. USD/CAD 2Q 1.43, 4Q 1.41

� TRY: political/policymaking uncertainty. USD/TRY 4Q 4.26

� CNY: managed depreciation. 2Q 7.20, 4Q 7.10

� KRW: political uncertainty, the QE debate and investment diversification. USD/KRW 4Q 1210

� ARS and BRL: policy reform and a return to growth

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Currencies one year after the Fed’s first hike

Source: J.P. Morgan

As occurred after first Fed hikes of ‘83, ‘94 & ‘99 cycles, USD paused then made new highsJPM USD Index two years before and after first Fed hike for cycles that began in 1983, 1986, 1994, 1999, 2004 and 2015.

� Almost one year after the Fed’s first hike in Decem ber 2015, the trade-weighted dollar is repeating th e pattern of previous bull markets driven by Fed cycles in 1983, 1994 and 1999. In early 2016 the dollar retraced lower soon after the first Fed hike on a combination of Fed dovishness and positive non-US developments (slower supply growth in oil, China fiscal stimulus). The dollar began to regain momentum even before Trump’s election as a strengthening US economy and rising inflation forced another rethink on Fed policy. Trump’s victory has lifted the USD index by 6%. USD index is +42% from2011 low. The early 1980’s Reagan-rally was +60%

The FX market was not entirely USD-centric last year - local factors resulted in a marked differentiation in performance2016 change in local ccy vs USD

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1. US fiscal policy becomes expansive, but only moderately

Source: J.P. Morgan

Republican Presidents do not have a record of more fiscal discipline than DemocratsAverage budget balance and real GDP growth during President's term(s)

Trump makes delivering the Fed dots more likely End 2016, 2017 and 2018 OIS rates versus FOMC projections

-1.0%

-2.9%-1.9%

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2.9% 2.9%3.8% 3.7%

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fiscal balance

real GDP growth

� JPM Economics expects total household and corporate tax cuts worth $200bn . This should lift the level of GDP by 0.4-0.5% by end-2018 assuming an average fiscal multiplier of close to 0.5. Spending increases are too slow to impact the 2017 forecast ($150bn over 5 years equates to around 0.1% of GDP per annum).

� Outside of the US , we expect few meaningful changes to fiscal thrust. Only Japan’s fiscal setting becomes expansionary while the UK’s become less restrictive. China’s should be neutral after 2016’s boost. There are slim odds of fiscal easing in the Euro area , even in Germany post-election.

� US GDP to accelerate from 1.5% to 1.9%. The Euro area is broadly steady at 1.5%. China to 6.5% vs 6.7%.

1.45%

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Dec 18 OIS Dec 18 Fed

Dec 17 OIS Dec 17 Fed

Dec 16 OIS Dec 16 Fed

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If fiscal policy ratifies Fed through 2018, USD has 5% upside

Source: J.P. Morgan

Trump's fiscal ambitions worth about 2% if they make the 2017 dots credible and another 3% on 2018 dotsJPM USD Index (ticker JBDNUSD) versus trade-weighted 2-yr spreads between the US and rest of the world

A 3% terminal funds rate would imply 10% cumulative additional USD appreciationUSD index appreciation implied by USD OIS rates converging to the Fed dots

� The Fed's rate projections envisage three hikes this year and a cumulative 150bp by end-2018. The OIS curve prices two hikes and 100bp. The USD index would rally another 2% if the 2017 d ots were priced and 5% in total if the 2018 dots were to be priced. A terminal funds rate of 3% would lift the dollar index by a cumulative 10%.

� The USD-bearish wildcard is protectionism that stalls the economy/Fed hikes. The USD-bullish wildcard is comprehensive corporate tax reform that reverses 15 years of long-term capital outflows. Corporate profits repatriation is an overhyped issue since much of this cash already sits in USD (see US elections and corporate profits repatriation from Aug 25, 2016).

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JPM USD indextrade-weighted US 2-yr rates minus ROW (majors), bp

+5% if 2018 dots credible

+2% if 2017 dots credible

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Dec-17 Dec-18 Dec-19 Long-term

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Much – but maybe not enough – has changed since the 2013 tantrum

Source: J.P. Morgan

Sensitivity of EM portfolio flows to US rates has not diminished, despite the likelihood of a historically low terminal Fed rate this cycleUS 2-yr yields (rolling 3-mo change, basis points) versus EM stock and bond flows (3-mo sum, $ billions)

Relative to 2016, JPM's expects stronger 2017 growth for US, Japan, Canada, Brazil, Russia, Hungary, Peru & Chile Real GDP growth year-on-year as latest value, 2016 forecast and 10-yr average

� EM portfolio flows continue to move inversely with rethinks on Fed policy. This sensitivity may surprise some who think that most of the macro and financial imbalances that hobbled non-USD currencies during first phase of the Fed cycle had abated. But while much has changed over the past three years in some countries, perhaps not enough has in all countries.

� On growth, JPM's expects stronger 2017 performance relative to 2016 only for US, Japan, Canada, Brazil, Russia, Hungary, Peru & Chile.

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US 2-yr, 3-mo change, bp (lhs)

EM portfolio flows, 3-mo sum, $bn (rhs)

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latest value 10-yr avg JPM 2017 forecast

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Current accounts and real rate differentials: better for many but not all

Source: J.P. Morgan

Eight countries have current account deficits 3% of GDP, down from 12 pre-tantrum CA as % of GDP; latest value (square) versus pre-tantrum level (circle)

Real rate spreads up for BRL, IDR, INR, ZAR, MXN & RUB Difference in real policy rates (policy rates deflated by core inflation) between the US and other country

� On current account deficits , for example, eight countries still post deficits of more than 3% of GDP (Colombia, UK, Turkey, Australia, Canada, Mexico, South Africa, New Zealand), down from 12 countries pre-tantrum.

� On real interest rate differentials to the US, spreads have only widened for six countries (BRL, IDR, INR, ZAR, MXN and RUB), while they have compressed for most others.

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latest value pre-taper tantrum

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Keeping it real: what distinguishes Reagan’s Dollar from Trump’s

Source: J.P. Morgan

Some high-yielders still trade above their long-term average Deviation of JPM real effective exchange rate (PPI-based) from long-term average; latest value (blue square) versus pre-tantrum level (red circle)

Real interest rates rose over 1000bp under Reagan, but only 35bp so far under Trump US real 10-yr yields (TIPS since 1997, nominal less CPI before) versus JPM USD real effective exchange rate

� Valuations have clearly improved, however: eight countries real exchange rates trade more than 10% above their long-term average down from 14 pre-tantrum.

� The USD-bullish wildcard is that real interest rates ris e significantly , either because Fed tightening proceeds more quickly than even the dots or than realised inflation. It seems inconceivable that a Yellen Fed – or the Fed of her successor from February 2018 – would respond to fiscal easing with the Volcker-like moves that creates the highest real rates and strongest dollar in history. But this interplay between fiscal and monetary policy will be central to the dollar outlook throughout this Administration (see Four common but tough questions since Trump's election Nov 11, 2016).

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Q1 2013 (pre-taper tantrum)

10% above average

10% below average

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US 10-yr real yield (TIPS since 1998), %JPM USD real effective exchange rate (CPI-based)

Reaganomics

Trumpanomics

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2. US trade protectionism advances from threat to reality

Source: J.P. Morgan, US National Archives

� Since Candidate Trump swept almost every Rust Belt state on the road to Washington, President Trump is incentivised to make trade conflict becomes part of the policy fabric. Conflict need not involve the extreme campaign pledges to impose 45% tariffs on Chinese imports and to withdraw from NAFTA. The President enjoys a spectrum of measures including: labelling a country to currency manipulator; imposing countervailing duties on narrow to broad ranges of goods; renegotiating aspects of a trade accord; and withdrawing from a trade agreement; and withdrawing from the WTO Except for MXN’s extremely cheap real exchange rate, most currencies do not exhibit a meaningful risk premium for trade conflict in 2017. See Yes, Mr. (Madam) President: US elections, executive orders and markets from October 3, 2016 and Trump and trade policy: the menu of options from Nov 11, 2016.

Number of executive orders issued by President

Number of EOs issued by subject over past 20 years

1803

522

1203968

3721

907

484214 325 346

169320 381

166364 291 252

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Trade 6 3 14

Immigration 0 2 3

Terrorism 1 6 0

Defense 5 16 15

US Treasury* 22 2 0

Energy 3 5 5

China 0 0 1

Japan 0 0 1

Russia 2 0 1

Ukraine 4 0 0

Syria 4 3 0

Libya 2 0 0

I ran 9 0 3

I raq 2 7 0

Balkans** 1 2 15

North Korea 1 1 0

* general US Treasury or the Office of Foreign Assets Control

** fomer Yugoslavia and successor states

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3. Bund yields move as much as USTs due to tapering

Source: J.P. Morgan

QE currencies appreciate well before QE expires JPM nominal effective rates for USD, EUR and JPY during easing (green), pauses (yellow) and hikes (red)

The actual or suspected end of easy money almost always drives spikes in rate volatility 3Mx10Y swaption volatility in US, Euro area and Japan; basis points per day

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Taper Tantrum ('13)

BoJ ended QE ('06)

USEuroJapanlast Fed ease of cycle ('03)

Bund VaR shock ('15)

� Since only the US will ease fiscal policy meaningfu lly in 2017, it seems the Fed is the only central b ank whose policy shifts might boost bond yields or drive curr encies. This view is too narrow. Recall that for most of the past six months, the ECB and BoJ had been the ones who delivered more persistent hawkish surprises by not easing in the face of persistent inflation undershoots, leading some (including us) to discuss the slow-motion regime change underway within those central banks in response to capacity constraints, philosophical objection, political pushback and adverse consequences on banks (obvious) and savers (feared rather than obvious). See Tiptoeing around regime change in Europe and Japan: implications for bonds, FX & commodities from August 30, 2016.

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QE’s inevitable consequences: extreme valuations and positions

Source: J.P. Morgan

Valuation problem: nominal rates below nominal GDP growth for most of QE era 10-yr government bond yields minus nominal GDP growth, %

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Fed QENikkei bubble

global savings glut

ECB/BoJ QE

USEuroJapan

� The framework: (1) QE programmes create extreme valuations and positioning/hedging imbalances due to the perception of one-way risk; (2) valuations are as stretched in Bunds and JGBs now as they were in Treasuries before the Fed taper tantrum in spring 2013, and positioning is long; (3) misalignments render Euro area and Japanese bond yields vulnerable to spikes on explicit policy shifts and even more subtle ones, since markets can sometimes frontload a policy environment that may require several quarters to materialise; (4) higher yields should sponsor euro and yen appreciation by either reversing the unprecedented capital outflows of the past three years or by deterring outflows in countries already running large current account surpluses of about 3% of GDP; and (5) the ECB has signaled the early onset of tapering from April 2017, albeit they are responding more to political and capacity constraints than attainment of the inflation objective.

US P/E at new high ex dot-com bubble years1-yr forward P/Es for S&P500, Eurostoxx and MSCI EM

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S&P500 EuroStoxx MSCI Emerging Markets

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Currency extremes are often the flip side of bond extremes

Source: J.P. Morgan

Positioning problem: QE promotes duration extension US duration positions measured by net CFTC positions (thou of contracts). European positions measured by JPM biweekly investor survey (deviation from benchmark in years)

The flip side of overvalued Bunds and short duration positions: the euro is slightly cheap and investors are shortJPM Euro real effective exchange rate index (PPI-based) versus net IMM positions in euros (thousands of contracts)

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US rate positions (CFTC), thou contractsEuro rate positions, deviation from bench, years (inverted)

Fed taper tantrum Now

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IMM net spec positions in euros (thou contracts)JPM EUR real effective exchange rate (PPI-based)

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Beneficiaries of QE capital flight become victims of regime change

Source: J.P. Morgan

European purchases of foreign bonds since 2014: €429bn of US, €132bn UK, €61bn Canada & €50bn Scandinavian/Cen Europe Cumulative bond outflows from Euro area in billions of euros

Japanese purchases of foreign bonds since 2013: ¥37bn US, ¥6trn Euro area, ¥2.5trn EM and ¥1.6trn Australia Cumulative bond outflows from Japan in trillions of yen

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� Since the BoJ launched QQE 1 in April 2013, Japanese outflows into foreign bond markets have totalled ¥37trn for US ($336bn), ¥6trn for Euro area ($55bn), ¥2.5trn for emerging markets ($23bn), ¥1.6trn for Australia ($15bn), ¥0.5trn for UK ($4.5bn) and ¥0.3trn for New Zealand ($3bn).

� Since the ECB implemented negative rates in June 20 14, launched QQE 1 in April 2013, Euro area outflow s into foreign bond markets have totalled €429bn for US ($404bn), €132bn for UK ($124bn), €61bn for Canada ($58bn), €47bn for Scandinavia and Central Europe ($45bn), €19bn for Japan ($21bn) and €11bn for Switzerland ($12bn).

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Would small changes in policy matter when CBs remain dominant?

Source: J.P. Morgan

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2009 2010 2011 2012 2013 2014 2015 2016 2017

US UK Japan Euro area

ECB and BoJ dominate government bond markets more in 2017 than Fed did in 2013 Central bank government bond purchases as percentage of net issuance (gross issuance less redemptions)

� Would changes in policy matter if they are smaller, slower and more subtle than the Fed's explicit tapering guidance in 2013? This is a judgment call, since such an exit would be unique for QE programmes. Our judgment is that even small changes matter because bonds remain overvalued and investors long duration plus short the currencies.

� Optimistic case: Short-term fair value frameworks suggest a rise in 10-yr Bund of about 25bp if the growth and inflation outlook hasn’t changed and if tightening is still years away. Peripheral spreads widen about 50bp. These targets seem tame compared to the 2013 taper tantrum and 2015 Bund VaR shock, but ECB and BoJdominate their respective government bond markets much more today than the Fed in 2013.

� Overshooting case: Given positioning and valuations and markets' tendency to front-load policy shifts, Bunds could correct 100bp. The periphery could widen by 100bp. EUR and JPY would rise at least 5% versus USD if the usual rates/FX betas hold, but maybe 10% given the short base in the euro and Japan's massive foreign asset holdings. An FX carry basket could decline 8% given sensitivity to high-vol rate rises but average investor exposure.

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4. Populism bends but doesn’t break EMU

Source: J.P. Morgan, Eurobarometer semi-annual survey conducted May 2016

Hardly anyone in Europe has a positive impression of the EUSurvey question: Does EU conjure up a positive, neutral or negative image?

But most Euro area citizens seem to like the euroSurvey question: Are you for or against the euro?

� After Brexit and Trump, most think that populism has gone viral and that pollsters miscount the effect. If true, then the Euro area will almost certainly face a crisis in 2017 given the Italian referendum on electoral reform on December 4, 2016, and national elections in the Netherlands (March), France (May), Germany (by October) and possibly Italy (depending on referendum outcome.

� But before running with alarmist headline, note the following on polls: sometimes polls correctly measure populism’s minor influence (Spain); sometimes polls correctly measure populism’s major influence (Greece); and sometimes polls are close-to-useless (Trump, Brexit). So the strength of one’s conclusion varies with the sample size of recent elections.

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taR

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iaLi

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aS

pain

Por

tuga

lA

ustr

iaFr

ance

Ger

man

yM

alta

Finl

and

Net

herla

nds

Bel

gium

Latv

iaS

lova

kia

Est

onia

Slo

veni

aIre

land

Luxe

mbu

rg

50% threshold

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The polls and the outlook by country

Source: J.P. Morgan

France: Presidential polls put Le Pen tied for lead in first round but not in secondPercentage of survey respondents supporting each candidate

Germany: polls suggest another grand coalition Percentage of survey respondents supporting each candidate

� JPM framework on this issue: (1) The most recent polls are mixed: in France, the anti-EMU Marine Le Pen scores as well as any conventional candidate; in Holland, anti-EMU Freedom Party polls as well as the ruling party; but in Germany, the AfDsubstantially trails the grand coalition of Merkel’s CDU plus the SPD; and in Italy, the ruling PD still leads the anti-EMU FiveStar Movement; (2) An anti-EMU government that makes good on its promise to hold an EU referendum would implicitly be asking its citizens if they would like to leave the currency union; and (3)The only country to have held a referendum that was also implicitly an EMU membership vote (Greece in summer 2015 when the population opined on the Troika programme) suffered runs on banks and imposed capital controls, which remain in place. Our judgment is that most Euro members get the rub, which is why the majority of citizens in these countries support the euro even though only a minority seem to think favourably of the EU. See also Why the euro struggles to price Frexit, Nexit or Gerexit from June 28, 2016.

Socialist (Hollande),

11%

other/undecided , 11%

Left (Mélenchon),

12%

En Marche (Macron), 13%

Republicans (Juppé), 27%

National Front (Le Pen), 28%

Free Democrats

(Lindner), 5%Left (Kipping),

9.00%

Greens (Ozdemir),

12%

AfD (Petry), 14%

SPD (Gabriel), 22%

CDU/CSU (Merkel), 33%

undecided, 5.00%

Source: J.P. Morgan, Ipsos and Elabe average poll results conducted Sept 2016 Source: J.P. Morgan, Forschungsgruppe Wahlen Polibarometer

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5. Oil achieves a higher range towards $60/bbl

Source: J.P. Morgan

Gulf producers have recaptured some market share from the US Oil production by country in millions of barrels per day

0%

2%

4%

6%

8%

10%

12%

14%

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Saudi Arabia US Iraq Iran

Most major producers still require oil in $50/bbl to $70/bbl to achieve fiscal balance Oil price at which fiscal balance is zero

149

8593

5970

120

7060 56

72

53 55

0

25

50

75

100

125

150

175

200

225

2014 2017

$50/bbl

� After two years of falling average oil prices – Brent averaged $99/bbl in 2014, $54/bbl in 2015 and $44/bbl in 2016 –enough could be changing on the supply front to gen erate a higher range in 2017 NEAR $60 . Two years of price declines have promoted notable rebalancing, which is obvious on several indicators. US crude output has fallen by about 1mbd from its mid-2015 peak of 9.6mbd to the current 8.6mbd. Market share has shifted from the US (plus Venezuela, Libya and China), back towards Gulf states. One rebalancing that hasn’t occurred, however, is f iscal. The fiscal breakeven oil price – that which eliminates producer countries' budget deficits – remains north of $50/bbl for most sovereigns. This lack of indefinite financing flexibility is why it seemed like an OPEC accord was always a question of when and not whether: countries didn’t have the reserve cover or sufficient market access to pursue price war indefinitely.

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USD/oil correlation could fall to zero

Source: J.P. Morgan

RUB positions are near record-long, CAD ones are moderately short Net speculative IMM positions in CAD and RUB, $ billion equivalent

-8

-6

-4

-2

0

2

4

6

8

10

12

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

2009 2010 2011 2012 2013 2014 2015 2016

CAD IMM positions, $bnRUB IMM positions, $ bn

The USD-oil correlation can turn positive if oil markets are tightening when the Fed is too Rolling 6 & 12-mo correlation between weekly changes in JPM USD Index and oil

� Implications for FX and for the USD/oil correlation : Although all petro-currencies would rally initially on an accord, only RUB should be a consistent beneficiary. Accounts are short CAD, but this currency plus MXN should carry a risk premium until the Trump Administration clarifies isn't objectives on NAFTA. NOK will remain a very low-yield oil currency (0.5%) compared to RUB (10% now, 9.5% forecast by mid-2017) and COP (7.75% now, 5.75% by mid-2017) since the economy looks too fragile to justify rate hikes next year. Implications for the broad USD are minor relative to other influences: yes, high oil prices lend the Fed more confidence in the inflation outlook required to lift rates, but President-elect Trump fiscal programme will be much more important. The dollar-oil correlation will probably move towards zero or might become positive, as occurs every several years when the macro environment combines strong demand and Fed tightening as in the mid-1990s (so higher USD and oil), or when it blends supply stress and other USD-supportive factors like 2013.

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

rolling 6-mo correl rolling 12-mo correl

Rising USD & oil: OPEC cuts and Fed hikes

Rising USD & oil: supply

stress

Rising $ & oil: strong demand

&Fed hikes

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6. FX Valuation – a generally successful systematic strategy

Source: J.P. Morgan

The strategy of buying (selling) the cheapest (richest) quintile of currencies ranked on this signal have delivered positive returns for seven consecutive yearsSpot and total returns from being long/ short the cheapest/ richest quintile of the global FX basket; % (annual returns except for 2016 which is YTD)

Current ranking based on the deviation from 15-year averages: USD/JPY looks vulnerable, SEK and EUR are attractiveBased on REERs

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15

Spot returns

Total returns

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

MX

NJP

YT

RY

GB

PZ

AR

MY

RE

UR

SE

KP

LNC

AD

NO

KH

UF

KR

WA

UD

TW

DB

RL

RU

BN

ZD

SG

DC

HF

US

DIN

RC

NY

� Systematic valuation strategies delivered positive returns again in 2016, in part because cheap currencies unusually offered positive carry (high-yielders were cheap)

� The 2017 outlook for valuation strategies is relatively more benign with carry less onerous than average, although an offset is that the “value” basket isn’t really that cheap. We sold NZD/SEK as a value trade in G10, although a fter recent movements JPY is once again screening cheap and the USD falls within the expensive basket

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7. FX carry – a tougher outlook this year

• Model: Annual returns on global carry basket = -13.1 + 0.1.517*(average yield on basket over the past year in %) + 1.12 *(EM industrial production growth year-on-year in %) – 1.37 * 1y change in VXY global (%pt). R-sq = 0.77. Model estimated on monthly data over the past 15 years.

Source: J.P. Morgan

FX carry trades worked in 2016 for the first time in three years, and better than the typical drivers of carry trades would suggestActual vs. model* returns on global FX carry strategies; %oya

What happens to carry in disorderly bond market sell-offs? Net longs in high beta FX were cut and returns were negativeIndex of returns from a global FX carry basket vs. position metric for high beta currencies* (5-year zscore)

-30

-20

-10

0

10

20

30

2004 2008 2012 2016

ActualModel

+2.3%

-3.9%

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

220

225

230

235

240

245

250

255

260

265

270

2013 2014 2015 2016

Commodity FX IMM positionsFX carry return index

Taper tantrum

Bund sell-off

� Returns from carry strategies have overshot their f undamental drivers and were likely a result of stability in EM growth and a decline in G3 yields to record lows. The outlook is for negative returns in 2017 given a lower level of yields on the basket, prospects of higher market vol and long positioning.

� Strategy – cherry pick carry trades were yields are highest (ARS) or fundamentals generally benign (RUB ).

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Global FX forecasts (see latest FX Markets Weekly)

Up (down) arrows indicate a forecast revision for resulting in a stronger (weaker) target for the local currency.

Source: J.P. Morgan

Exchange rates vs. U.S dollar

Current

Majors 22-Nov Dec 16 Mar 17 Jun 17 Sep 17 Dec 17

EUR 1.06 1.05 ↓ 1.04 ↓ 1.06 ↓ 1.08 ↓ 1.15

JPY 111 109 ↓ 108 ↓ 105 ↓ 102 ↓ 99

GBP 1.25 1.21 ↓ 1.21 ↓ 1.19 ↓ 1.20 ↓ 1.26

AUD 0.74 0.74 0.73 ↑ 0.71 ↑ 0.69 ↑ 0.68

CAD 1.34 1.38 ↓ 1.40 ↓ 1.43 ↓ 1.42 ↓ 1.41

NZD 0.71 0.70 0.68 ↑ 0.66 ↑ 0.64 ↑ 0.62

JPM USD index 124.2 125.6 ↑ 127.5 ↑ 127.9 ↑ 127.2 ↑ 125.1

DXY 100.7 102.2 ↑ 102.7 ↑ 101.5 ↑ 99.6 ↑ 94.5

Europe, Middle East & Africa

CHF 1.01 1.02 ↓ 1.01 ↓ 0.99 ↓ 0.96 ↓ 0.90

ILS 3.86 3.85 ↓ 3.85 ↓ 3.75 ↓ 3.70 ↓ 3.65

SEK 9.20 9.52 ↓ 9.52 ↓ 9.29 ↓ 9.03 ↓ 8.39

NOK 8.50 8.57 ↓ 8.56 ↓ 8.30 ↓ 8.06 ↓ 7.48

CZK 25.39 25.73 ↓ 25.98 ↓ 25.49 ↓ 25.02 ↓ 22.61

PLN 4.15 4.24 ↓ 4.33 ↓ 4.29 ↓ 4.26 ↓ 4.04

HUF 289 297 ↓ 303 ↓ 297 ↓ 294 ↓ 278

RUB 63.58 66.88 ↓ 67.00 ↓ 66.50 ↓ 66.00 ↓ 65.00

TRY 3.36 3.50 ↓ 3.65 ↓ 3.65 ↓ 3.65 ↓ 3.65

ZAR 14.07 14.75 ↓ 15.25 ↓ 15.10 ↓ 14.85 ↓ 14.70

Americas ARS 15.38 15.40 ↑ 15.90 ↑ 16.25 ↑ 16.80 ↑ 17.70

BRL 3.35 3.40 ↓ 3.45 3.50 3.55 3.60

CLP 674 675 ↓ 680 690 ↓ 675 ↓ 660

COP 3149 3150 ↓ 3200 ↓ 3200 ↓ 3250 ↓ 3250

MXN 20.34 20.75 ↓ 21.25 ↓ 21.40 ↓ 21.60 ↓ 21.80

PEN 3.42 3.38 ↓ 3.40 ↓ 3.40 ↓ 3.36 ↓ 3.34

VEF VEF† 660 700 ↑ 750 ↑ 825 ↑ 3000 ↓ 5000

Asia CNY 6.89 6.90 ↓ 7.05 ↓ 7.20 ↓ 7.15 ↓ 7.10

HKD 7.76 7.77 ↑ 7.79 7.81 ↓ 7.76 ↓ 7.75

IDR 13443 13800 ↓ 14000 ↓ 14400 ↓ 14200 ↓ 14200

INR 68.23 69.00 ↓ 69.75 ↓ 70.50 ↓ 69.50 ↓ 68.50

KRW 1176 1185 ↓ 1230 ↓ 1200 ↓ 1180 ↓ 1210

MYR 4.42 4.45 ↓ 4.50 ↓ 4.60 ↓ 4.50 ↓ 4.45

PHP 49.89 49.75 ↓ 51.00 ↓ 51.50 ↓ 51.00 ↓ 50.50

SGD 1.42 1.430 ↓ 1.470 ↓ 1.480 ↓ 1.460 ↓ 1.450

TWD 31.90 32.00 ↑ 32.50 ↑ 33.00 ↓ 33.25 ↓ 33.00

THB 35.44 35.75 ↓ 36.50 ↓ 36.75 ↓ 36.25 ↓ 36.25

ADXY 103.9 103.3 ↓ 101.3 ↓ 100.2 ↓ 101.1 ↓ 101.4

EMCI 65.7 64.6 ↓ 63.4 ↓ 63.0 ↓ 63.4 ↓ 64.1

Exchange rates vs Euro

JPY 118 114 ↑ 112 ↑ 111 ↑ 110 ↑ 114

GBP 0.85 0.87 ↑ 0.86 ↑ 0.89 ↑ 0.90 ↑ 0.91

CHF 1.07 1.07 ↑ 1.05 ↑ 1.05 ↑ 1.04 ↑ 1.03

SEK 9.80 10.00 ↓ 9.90 ↓ 9.85 ↓ 9.75 ↓ 9.65

NOK 9.05 9.00 ↓ 8.90 ↓ 8.80 ↓ 8.70 8.60

CZK 27.04 27.02 27.02 27.02 27.02 26.00

PLN 4.42 4.45 ↓ 4.50 ↓ 4.55 ↓ 4.60 ↓ 4.65

HUF 308 312 315 315 317 ↓ 320

RON 4.51 4.55 ↓ 4.55 ↓ 4.55 ↓ 4.50 ↓ 4.50

TRY 3.58 3.68 ↓ 3.80 ↓ 3.87 ↓ 3.94 ↓ 4.20

RUB 67.70 70.22 ↑ 69.68 ↑ 70.49 ↑ 71.28 ↑ 74.75

BRL 3.61 3.57 ↑ 3.59 ↑ 3.71 ↑ 3.83 ↑ 4.14

MXN 21.65 21.79 ↓ 22.10 ↓ 22.68 ↓ 23.33 ↓ 25.07

Current

22-Nov Dec 16 Mar 17 Jun 17 Sep 17 Dec 17

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DisclosuresFinanciero is a member of the Mexican Stock Exchange and authorized to act as a broker dealer by the National Banking and Securities Exchange Commission. Singapore: This material is issued and distributed in Singapore by or through J.P. Morgan Securities Singapore Private Limited (JPMSS) [MCI (P) 193/03/2016 and Co. Reg. No.: 199405335R], which is a member of the Singapore Exchange Securities Trading Limited and/or JPMorgan Chase Bank, N.A., Singapore branch (JPMCB Singapore) [MCI (P) 089/09/2016], both of which are regulated by the Monetary Authority of Singapore. This material is issued and distributed in Singapore only to accredited investors, expert investors and institutional investors, as defined in Section 4A of the Securities and Futures Act, Cap. 289 (SFA). This material is not intended to be issued or distributed to any retail investors or any other investors that do not fall into the classes of “accredited investors,” “expert investors” or “institutional investors,” as defined under Section 4A of the SFA. Recipients of this document are to contact JPMSS or JPMCB Singapore in respect of any matters arising from, or in connection with, the document. Japan: JPMorgan Securities Japan Co., Ltd. and JPMorgan Chase Bank, N.A., Tokyo Branch are regulated by the Financial Services Agency in Japan. Malaysia: This material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd (18146-X) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities Commission in Malaysia. Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities and Exchange Commission of Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia Ltd. is authorized by the Capital Market Authority of the Kingdom of Saudi Arabia (CMA) to carry out dealing as an agent, arranging, advising and custody, with respect to securities business under licence number 35-07079 and its registered address is at 8th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai: JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Financial Services Authority (DFSA) and its registered address is Dubai International Financial Centre - Building 3, Level 7, PO Box 506551, Dubai, UAE.

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