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and less disruptive for markets, in particular given the expected improved foreign relations with the US (Chart 67). However, the currency remains overvalued and highly exposed to global factors, in particular oil price, and positioning is crowded. Despite our forecast is for USD/RUB to remain around 63 in 1Q17, we prefer to mitigate the above- mentioned risks by choosing a more favorable funding currency. If liquidity is a major consideration, we prefer to use the EUR as a funding currency, which offers negative carry vs the USD, and gives the ruble the best risk-adjusted carry across all potential funding currencies. In addition to the already seen impact on US rates, Trump’s victory implies that political risks are becoming increasingly important in Europe, with the Italian referendum in December and elections in Netherlands, Germany and France in 2017. This scenario strengthens our call for a six-month extension to ECB QE at the current pace. We expect the EUR/USD to trade at 1.05 by end 1Q17. Since short EUR/RUB is still exposed to much lower oil prices, an alternative way to express the trade is to use a basket of euro, Colombian peso and Canadian dollar as funding basket (Chart 66). The COP remains overvalued, the central bank is expected to ease monetary policy as the economy decelerates and oil represents 35% of Colombian exports. We expect the COP to depreciate 2.5% by end 1Q17. Carry, on the other hand, is higher than EUR and CAD. The CAD offers very low carry and we forecast a 1.5% depreciation by 1Q17 vs the USD. The economy keeps displaying weak growth and we expect the Bank of Canada likely to cut rates and maintain the accommodative stance of monetary policy. Asia: short SGD/INR We like short SGD/INR (spot 47.96, target 47, stop 48.44). While the performance of Asia FX can be influenced by broader risk conditions, we expect most to weaken vs. the USD. The Korean won and the Singapore dollar, as well as the Taiwanese dollar for instance stand out as being the most sensitive to a stronger USD, as they act as a high beta proxy for CNY, which we expect to continue depreciating in this new high US rates environment. Others like Indonesian rupiah and Malaysian ringgit are more sensitive to higher USD rates. Consequently, outflows from these countries will adversely impact the respective FX. That said, Bank Indonesia has built good amount of reserves to prevent rupiah from weakening excessively. Moreover, tax amnesty related repatriation flows and global bond issuance is still expected to come in December, which should also support the rupiah. Historically, large US tax cuts have been followed by a widening of the US current account deficit driven by higher imports. This supported Asia export growth and exchange rates, especially after the Bush tax cuts. However, this time could be different partly because US household spending has been shifting towards non-tradable services. More importantly, Trump’s policy platform itself is geared towards reducing dependence upon foreign goods and services (Chart 68). Chart 68: Export exposure to the US across EM Asia Chart 69: SSNEER has depreciated 50bp below par since Oct MPS 20 F Index m Exports to the US in 2015 (% of GDP) 30 15 5 10 20 15 == BofA-ML SGD NEER 5 === lower end of band 10 ——= mid-point —— upper end of band ° eS CS oe" Le & 0 ; “J si os 5 & OTDOMDODoOOT THAN YMMYMOAT OO CO CO a xs SF WV e & & e Ser I2e RESET hERER ET EB ER “ ge ¥ < RS £626 8 S828 Z8 28 28 F285 Source: BofA Merrill Lynch Global Research, Bloomberg Source: BofA Merrill Lynch Global Research estimates, Bloomberg Bankof America Global Rates, FX & EM 2017 Year Ahead | 16 November 2016 39 Merrill Lynch HOUSE_OVERSIGHT_014769