Unauthorized redistribution of this report is prohibited. This report is intended for [email protected] Liquid Insight Trump’s effect on MXN Key takeaways ¢ We provide an empirical analysis of Donald Trump's potential effects on the Mexican peso ¢ Our analysis suggests the exchange rate is perhaps as much as 15% undervalued « We remain neutral for now given US election risks are likely to remain high in the near term By Claudio Irigoyen and Ezequiel Aguirre Chart of the day: MXN may be as much as 15% undervalued ND oO ee) a) + 2. 2. S + a cs cs s x ao a NOE Ann OO NOE ADs OO 2014 2015 2016 Model (with Trump) = VX Model (without Trump) Source: BofA Merrill Lynch Global Research, Bloomberg Trump’s effect on MXN We provide an empirical analysis of Donald Trump’s effects on the Mexican peso. Our analysis suggests the exchange rate is perhaps as much as 15% undervalued. In our view, buying the Mexican peso likely would prove a profitable strategy if Hillary Clinton wins. However, we remain neutral for now given US election risks are likely to remain high in the near term. A model of MXN weekly returns including Trump We estimate a model of MXN returns with standard financial fundamentals that also includes Donald Trump’s RealClearPolitics polling average in the US presidential election. It is generally accepted now that Trump’s chances in the US election have been a major driver of the Mexican peso (Chart 1). Trading ideas and investment strategies discussed herein may give rise to significant risk and are not suitable for all investors. Investors should have experience in FX markets and the financial resources to absorb any losses arising from applying these ideas or strategies. BofA Merrill Lynch does and seeks to do business with issuers covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 6 to 7. Analyst Certification on page 5. 11668923 Timestamp: 22 September 2016 12:30AM EDT Bankof America Merrill Lynch 22 September 2016 Rates and Currencies Research Global Global Rates & Currencies Research MLI (UK) Claudio lrigoyen LatAm FI/FX Strategy/Economist MLPF&S +1 646 855 1734 [email protected] Ezequiel Aguirre LatAm FI/FX Strategist MLPF&S +1 646 855 9689 [email protected] Adarsh Sinha FX Strategist Merrill Lynch (Hong Kong) +852 3508 7155 [email protected] Yang Chen Rates Strategist Merrill Lynch (Hong Kong) +852 3508 8695 [email protected] See Team Page for Full List of Contributors Recent Liquid Insight Publications 21 Sep 2016 Eur FRA-OIS and 3s6s_ basis: tighter, despite wider credit spreads 20 Sep 2016 BoJ preview: Bod to try, try again 19 Sep 2016 A cautiously hawkish Fed 16 Sep 2016 UK _inflation-linked_— when the “pass-through” has passed through 15 Sep 2016 Getting unreal 14 Sep 2016 The real rate quide to FX 13 Sep 2016 Consumption Gumption 12 Sep 2016 UK: Better but not good 9Sep 2016 The Fed's cacophony of sound 8 Sep 2016 EEMEA: The ECB buys EM too HOUSE_OVERSIGHT_010609

We estimate a regression of weekly returns on the MXN spot exchange rate on five variables: a basket of commodity currencies, US equities, the 10-year US bond yield, the two-year interest rate differential between MXN and USD swaps, and RealClearPolitics polling average for Donald Trump in the 2016 US presidential election. The estimated equation is RON = bo + by RO + bz *RPP™ + bstdy”? + ba — °°) + bs*RCP + @ where A” is the MXN spot return, A" is the commodity currency basket spot return, RO” is the SP500 index return, dy’’ is the 10-year US bond yield change, ““ - 7°’ is the two-year swap rate differential (lagged one period), ACP is RealClearPolitics polling average for Donald Trump, and eis an error term. The commodity currency basket consists of BRL, CLP, COP, CAD, NOK and AUD with equal weights. The full data sample has weekly frequency and runs from 6/20/2012 to 9/21/2016. The model without Trump yields an R-squared coefficient of 0.50. Including Trump’s variable increases the coefficient to 0.63, a significant improvement (Chart 2). We use data only up to 1/27/2016 for parameter estimation of the financial variables. We use the full sample to estimate the parameter on Trump’s variable due to its shorter history. Chart 1: The Trump factor on the Mexican peso Chart 2: Forecasting MXN returns with and without Trump 20 48 . oO on for a) oS nN fy » . co a . » Ne} . » x » » x ow fF aD oO © » » &, ow fF ann oO © w NR » » » i ugi5 Nov15 Feb16 May16 Aug16 2014 2015 2016 ——MXN -=——=Trump's polling average ——— Model (without Trump) ====Model (with Trump) -=--=MXN Source: BofA Merrill Lynch Global Research, Bloomberg Source: BofA Merrill Lynch Global Research, Bloomberg A possible 15% negative shock on MXN According to the model that does not include Trump’s polling average, we estimate that MXN should be trading at around 16.50, more than 15% stronger than current levels (spot 19.72). Chart 2 shows the possible magnitude of the Trump effect on the Mexican peso. The model including Trump’s polling average appears to do a much better job at explaining the recent behavior of the Mexican peso. However, it still suggests that the currency has depreciated more than justified by Trump’s increase in recent polls. Based on Trump’s increase to 43.9% (RealClearPolitics polling average on 21 September) from 39% (RealClearPolitics polling average on 29 June), our model suggests the Mexican peso should be trading at around 18.50, still almost 7% stronger than current levels. This, however, does not necessarily mean that MXN has oversold. The almost 5% gain in Trump’s polling average since June could have had an outsized effect on MXN if those gains took place in swing states, potentially leading to crucial Electoral College votes. Strategy: neutral MXN for now From a strategy standpoint, we recommend staying neutral the Mexican peso for now. We believe the Mexican peso would likely strengthen significantly if Hillary Clinton wins the US election. But there is still significant uncertainty. Net speculative long USD/MXN positions are somewhat stretched, but could increase much more (Chart 3). jes Bankof America 2 Liquid Insight | 22 September 2016 Merrill Lynch HOUSE_OVERSIGHT_010610

The Bank of Mexico will meet on 29 September, and a 50bp rate hike is already priced in (Chart 4). A stronger hike, perhaps of 75bp, or a 50bp rate hike accompanied by a hawkish statement could lead to MXN strengthening in the very short run. Chart 3: Net speculative USD/MXN position in CFTC Chart 4: Bank of Mexico expected to hike 8 20 300 6 "8 250 4 18 > 17 200 0 16 150 2 8 100 2 4 14 8 12 0 kt oe 0 2013 2014 2015 2016 2012 2013 2014 2015 2016 mms Net Dollar position ———=MXN mmm spread —=—‘1y TIIE -—=—=ONR Source: BofA Merrill Lynch Global Research, Bloomberg Source: BofA Merrill Lynch Global Research, Bloomberg Notable Rates and FX Research * Global Rates & Currencies 2016 Year Ahead, 23 November 2015 * USD/MXN builds momentum, FX Quant Trader, 19 Sep 2016 * Central banks still the only game in town, Global Rates and FX Weekly, 15 Sep 2016 * Land of the rising bond yield, US Rates Weekly, 16 Sep 2016 * Policy uncertainty, Liquid Cross Border Flows, 19 Sep 2016 Key trade ideas Top Rates and FX trades for 2016 For rationale and details, refer to Global Rates & Currencies 2016 Year Ahead: The “Great Divorce”, 23 November, 2015 Rates: Buy US 30y TIPS, entry: 1.2%, target: 70bp, stop loss: 1.55% Closed at 101bp (3 Mar 2016): Short USD 5y5y vs EUR 5y5y, entry: 115 bp, target: 160 bp, stop-loss: 90 bp (3 Sep 2015) Long $100mn 6m5y ATMF UK vs $100.75mn US rates straddles, net take-in: $126K, target: +450K, stop: -$225K Sell 3y Fannie Mae debt vs Treasuries, entry: 6bp, stop: 2bp, target: 20bp Closed at 11bp - Long 12m Treasury bills vs OIS, entry: 1bp, target: -10bp, stop: 7bp FX: Closed at 6.5630 (26 May 2016): Buy USD/CNH 6m forward outright, entry: 6.5260, stop: 6.40 Long a 12m USD/CNH forward outright, entry: 6.7485, target 7.00, stop: 6.67, current: 6.7420 (26 May 2016) Closed at 0% - Buy EUR/USD 3m 1.10 call with a 16 Dec 1.1050 window KO, cost: 0.55% EUR (spot: 1.0690) Buy ly EUR/USD<1.00, USD/JPY<120 dual digital, cost: 7.0% USD (spot: 1.0690, 122.80) Bankof America <> ee Merrill Lynch Liquid Insight | 22 September 2016 3 HOUSE_OVERSIGHT_010611

Closed at 902 (10 Mar 2016): Buy AUD/KRW, entry: 832, target: 920, stop: 859 (revised from 790) Closed at 38.25 (18 Apr 2016): Sell TRY/JPY, entry: 43.40, target: 36.15, stop: 45.25 Closed at 8.27: Sell USD/NOK spot 8.685, target: 8.27, stop-loss: 8.60 (revised from 9.00} New trades Rates: Mar17 FRA-OIS widener, entry: 6.25bp, target: 10bp, stop loss: 4bp (21 Sep 2016} * Despite recent tightening, richness of bonds vs OIS, upcoming TLTRO & corporate issuance point to renewed widening Existing open trades For a complete list of our open trade recommendations, as well as our trade recommendations closed over the last 12 months, please see: Global Rates and FX Weekly: Central banks still the only game in town 15 September 2016 Rates: Pay 5y5y forward 3s6s basis, entry: 11.3bp, target: 13.3bp, stop: 10.3bp (10 Aug 2016) * Bank hedging flows on the back of sharp pickup in corp issuance suggests the widening of 3s6s basis is structural. It also hedges any aggressive ECB easing in Sep Buy 6m30y ATMF+25bp/+50bp/+75 bp payer ladders for a net premium of €950k on €100m notional (or 3.3 bp) (20 Jul 2016) *30y rates are at risk from the ECB tomorrow, especially if tweaks to the capital key are flagged already Buy 3-year 3.5% ZC RPI inflation caps, entry: 26.0c; current 37.5c (21 Oct 2015) *Sterling vulnerability due to the UK's large current account deficit makes being long inflation volatility attractive. Pairing this trade with a long-standing recommendation to be short 30-year UK breakevens is an attractive way to finance it. Closed at O (22 Jul 2016): Buy 167 Aug RXU6 call and buy 162 put, cost 118 cents (16 Jun 2016) Closed at 55bp (12 Jul 2016): OATei 2018/2027 flattener; entry: 78.5bp, target: 40bp; stop-loss: 100bp (11 Mar 2016) LG Short EURUSD 6m 1.0740/1.1500 risk reversal, cost: O (off 1.1077 spot)(6 Jul 2016) *EUR downside risks are underpriced. We think the post-referendum risk rally is overdone and could be at risk. Potential shocks include Brexit uncertainty, turbulence in Italy's banking sector, and political paralysis in Spain. Closed 1.0840 (1 Jul 2016): Buy 3m EURCHF 1.08/1.03 put spread for 0.76% Eur (7.75/8.05 ag 10.45 vols off 1.0930 spot)(1 Apr 2016} sae liye Bankof America 4 Liquid Insight | 22 September 2016 Merrill Lynch HOUSE_OVERSIGHT_010612

* EUR is underpricing Brexit and that shorting Euro was a cheaper way to express such a view via options. CHF tends to perform strongly when risks become more localized. Closed on 28 Aug 2016: Buy EUR/USD 6m 1.00/1.20 strangle for 155 usd pips (off 1.1020 spot, DF two-way vols 12.1/12.3) (29 Feb 2016) *Owning low delta EURUSD strangles may be an effective and cheap double hedge in the scenario that either the US enters a recession or the European debt crisis resurfaces. Options Risk Statement Potential Risk at Expiry & Options Limited Duration Risk Unlike owning or shorting a stock, employing any listed options strategy is by definition governed by a finite duration. The most severe risks associated with general options trading are total loss of capital invested and delivery/assignment risk, all of which can occur in a short period. Investor suitability The use of standardized options and other related derivatives instruments are considered unsuitable for many investors. Investors considering such strategies are encouraged to become familiar with the "Characteristics and Risks of Standardized Options" (an OCC authored white paper on options risks). U.S. investors should consult with a FINRA Registered Options Principal. For detailed information regarding the risks involved with investing in listed options: http:/Awww.theocc.com/about/publications/character-risks.jsp. Analyst Certification |, Adarsh Sinha, hereby certify that the views expressed in this research report about securities and issuers accurately reflect the research model applied in such analysis. | also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report. Bankof America Merrill Lynch Liquid Insight | 22 September 2016 5 HOUSE_OVERSIGHT_010613

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Content endorsement by or es before y websi bject to change without ect to applicable quiet . Always refer to the most relating to such issuer (or s securities and/or irm policies. Bankof Ame: Merrill Lyne! rica h Liquid Insight | 22 September 2016 HOUS 7 E_OVERSIGHT_010615

US Ralph Axel Rates Strategist MLPF&S +1 646 855 6226 [email protected] Shyam S.Rajan Rates Strategist MLPF&S +1 646 855 9808 [email protected] John Shin FX Strategist MLPF&S +1 646 855 9342 [email protected] lan Gordon FX Strategist MLPF&S +1 646 855 8749 [email protected] Vadim laralov FX Strategist MLPF&S +1 646 855 8732 [email protected] Europe Ralf Preusser, CFA Rates Strategist MLI (UK) +44 20 7995 7331 [email protected] Ruben Segura-Cayuela Europe Economist MLI (UK) +44 20 7995 2102 [email protected] Mark Capleton Rates Strategist MLI (UK) +44 20 7995 6118 [email protected] Athanasios Vamvakidis FX Strategist MLI (UK) +44 20 7995 0790 [email protected] N Kamal Sharma FX Strategist MLI (UK) +44 20 7996 4855 [email protected] Myria Kyriacou FX Strategist MLI (UK) +44 20 7996 1728 [email protected] Ruairi Hourihane Rates Strategist MLI (UK) +44 20 7995 9531 [email protected] Sebastien Cross Rates Strategist MLI (UK) +44 20 7996 7561 [email protected] Pac Rim Tony Morriss Rates Strategist Merrill Lynch (Australia) +61 2 9226 5023 [email protected] Adarsh Sinha FX Strategist Merrill Lynch (Hong Kong) +852 3508 7155 [email protected] Shuichi Ohsaki Rates Strategist Merrill Lynch (Japan) +81 3 6225 7747 [email protected] Yang Chen Rates Strategist Merrill Lynch (Hong Kong) +852 3508 8695 [email protected] Shusuke Yamada, CFA FX Strategist Merrill Lynch (Japan) +813 6225 8515 [email protected] Global Emerging Markets Claudio Irigoyen LatAm FI/FX Strategy/Economist MLPF&S +1 646 855 1734 [email protected] David Hauner, CFA EEMEA Cross Asset Strategist MLI (UK) +44 20 7996 1241 [email protected] Claudio Piron Emerging Asia FI/FX Strategist Merrill Lynch (Singapore) +65 6591 0401 [email protected] Trading ideas and investment strategies discussed herein may give rise to significant risk and are not suitable for all investors. Investors should have experience in FX markets and the financial resources to absorb any losses arising from applying these ideas or strategies. Research Analysts 8 Liquid Insight | 22 September 2016 BankofAmerica <2” Merrill Lynch HOUSE_OVERSIGHT_010616