Chart 34: EUR/JPY and real GDP growth Chart 35: EURJPY and relative central bank Chart 36: EUR and JPY market positions balance sheets relative to the last 12 months 180 r 5 ———EEEE— reece 170 4 50.00 160 3 40.00 150 2 ca 145 30.00 1 140 45.0 35 20.00 130 ‘ 35.0 "Vl 10.00 120 2 25.0 | * 0.00 110 3 15 -10.00 4100 a ise | 20.00 90 5 50 yy W r“ sips See oe a Sea eae e 5.0 7" L 95 “#0100 Seas 8 2S ss so 5 & 50.00 wees RIE “eee. %q ‘S, %, ‘%,, %, Say ‘by, ey, Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 REAISOP SRE STRING! — Bol-ECB balance sheets (GDP shares, LHS} — FUR —— JPY Source: BofA Merrill Lynch Global Research. —— EURJPY (RHS) Source: BofA Merrill Lynch Global Research. Source: BofA Merrill Lynch Global Research. For more details, see Liquid Cross Border Flows. EUR rates are probably more vulnerable against US rates movements, as the market questions whether the next ECB move will be expansion or tapering. On the other hand, Japanese rates are insulated from foreign movements as the Bo) directly targets the 10yr yield. Japanese fiscal easing is also a possibility in light of reduced odds of TPP implementation and a potential snap election. Any positive impact of Japanese fiscal easing on growth is likely to manifest in higher inflation expectations under the Bo)’s yield-targeting regime, which means Japanese real interest rates could actually fall. Based on these considerations, we recommend buying a 6M EUR/JPY 122/130 call spread for 1.2312% EUR (spot ref. 116.84). Risks to our trade include a severe global shock that could strengthen the JPY, or the return of the Eurozone crisis; for example, if the government in Italy falls after Renzi loses the referendum in December or Le Pen wins the elections in France. Long RUB/KRW Post US elections and the improved outlook for fiscal expansion in the US, we see more upside in being long oil and reflation sensitive Russia than short technology and interest rate sensitive Korea. We recommend being long RUB/KRW heading into