Deutsche Bank's leveraged notes linked to Australian, Canadian dollars exposed to euro risk

By Emma Trincal

New York, Dec. 13 - Investors worried about Europe and a possible global economic slowdown should probably stay away from an upcoming offering that offers a bearish view on the U.S. dollar against two currencies that are highly correlated with the euro and that are sensitive to economic growth, sources said.

Deutsche Bank AG, London Branch plans to price 0% buffered return enhanced notes due Dec. 28, 2012 linked to the performance of a basket of two equally weighted currencies - the Australian dollar and the Canadian dollar - relative to the U.S. dollar, according to an FWP filing with the Securities and Exchange Commission.

The notes are designed for investors bullish on those two currencies but seeking some partial downside protection in the event of a U.S. dollar rally. The notes also offer some leverage with a payout at maturity of par plus at least 1.6 times any basket gain, up to a maximum return of 16%. The exact upside leverage factor will be determined at pricing. Investors will receive par if the basket falls by up to 10% and will lose 1.1111% for every 1% that it declines beyond 10%.

Play on growth

"This is a commodity play," said Douglas Borthwick, head of trading at forex execution firm Faros Trading.

"If you're long the Australian dollar and long the Canadian dollar, you're long risk.

"If you see the dollar rally against these currencies, this trade would not yield a good return."

Borthwick said that his firm recently changed its view on the U.S. dollar from bullish to neutral.

"If the European crisis was to be fixed, if the global economy continued to recover, then you would expect this kind of investment to make money," he said.

"We think it's too soon to tell, at least for another two years. There is too much uncertainty around Europe right now."

Euro connection

Marc Chandler, global head of currency strategy at Brown Brothers Harriman, said he is bullish on the U.S. dollar and has been for a few years. The notes, he added, are risky in today's European context because the two reference currencies are correlated with the euro.

"Some currencies, and that includes the Australian dollar, the New Zealand dollar and the Canadian dollar, are highly correlated to the euro," he said.

"They tend to move in the same direction but more so. If the euro sells off, these currencies will sell off more.

"Generally speaking, if you get a note tied to the Australian dollar, you get highly correlated to the euro."

Chandler compared the Australian dollar's recent percentage change with the percentage change of the euro.

"Eighty five percent of the time, those two currencies moved in the same direction and at the same magnitude," he said.

The correlation between the Canadian dollar and the euro, while "lower," was "still high" at 76.5%, he noted.

Getting exposure to Australia and Canada is not a bad idea in itself, he noted, unless the European debt crisis gets worse.

"It's possible that your basket will do well given the higher yields of those currencies, given the fact that those countries have a better banking system and are not in recession," he said.

"But if the euro goes down, they're going to go down more."

Chandler said that the Canadian currency may fare better than the Australian dollar, because Canada could benefit from the U.S. economy. Yet, the correlation between the Canadian dollar and the euro could still hurt the overall performance of the underlying basket.

"I'm bearish on the euro, and if anything, I haven't been bullish enough on the dollar," he said.

"I don't think the euro zone will disintegrate necessarily.

"People tend to think that if the European Central Bank doesn't backstop or if Europe doesn't issue euro bonds, the euro zone will break.

"I don't see that. The euro zone will survive, but the euro will fall.

"If you think that the euro will go down next year - and I certainly do - this investment is probably not for you," he said.

JPMorgan Chase Bank, NA and J.P. Morgan Securities LLC are the placement agents.

The notes will price on Friday and settle on Dec. 21.

The Cusip number is 2515A1F97.

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