Pre-reading Risk Currency Mock Session

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US$

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The beginning of the year has seen a strong performance in FX carry strategies. �

We look at the drivers and conclude that this mainly reflects an improvement in risk sentiment. �

The recent strong rally in $/JPY surprised, given most fundamentals remain Yen-supportive... �

...although the recent BoJ shift may be important if the Yen remains weak in the new fiscal year. �

The Global FX Monthly AnalystMarch 2012

The Global FX Monthly Analyst Goldman Sachs Global Economics, Commodities and Strategy Research

March 2012

Contents

Overview Recommended FX Trade Ideas i

Feature ii

G3 US Dollar 1

Euro 3

Japanese Yen 5

Europe, Middle East & Africa British Pound 7

Czech Koruna 8

Hungarian Forint 9

Israeli Shekel 10

Norwegian Kroner 11

Polish Zloty 12

Russian Ruble 13

South African Rand 14

Swedish Krona 15

Swiss Franc 16

Turkish Lira 17

Americas Argentine Peso 18

Brazilian Real 19

Canadian Dollar 20

Chilean Peso 21

Colombian Peso 22

Mexican Peso 23

Peruvian New Sol 24

Venezuela Bolivar 25

Asia Australian Dollar 26

Chinese Yuan 27

Hong Kong Dollar 28

Indian Rupee 29

Indonesian Rupiah 30

Korean Won 31

Malaysian Ringgit 32

New Zealand Dollar 33

Philippine Peso 34

Singapore Dollar 35

Taiwan Dollar 36

Thai Baht 37

FX Analytics Interest Rate Forecasts 38

GS Sentiment Index 39

FX Currents 41

GS Trade Weighted Indices 43

GS Anecdotal Flows 45

GSDEER 47

Key Economic Data 49

Policy Rate Forecasts 54

Exchange Rate Forecasts 55

The source for all tables/charts is Goldman Sachs Global ECS Research unless otherwise stated.

i


March 2012

Recommended FX Trade Ideas

Please see our Global Markets Daily Comment and Trade Updates for changes in these live trading strategies, as they change in line with market developments and our views.

Tactical FX Trade Performance 2012

Number Cum Return Avg Return Avg Duration

All Trades 5 5.1% 1.01% 18 days

Profitable 5 5.1% 1.01% 18 days

Loss-Making 0 0.0%

Recent Tactical FX RecommendationsOpen Quote Close Quote Potential

Day Time Day Time ReturnShort USD CNY (expiry 10Jun11) 01-Jan-11 "00:00" 10-Jun-11 "02:15" 6.5326 6.4853 0.73%Short AUD CAD 11-Jan-11 "23:43" 08-Feb-11 "17:00" 0.9703 1.0076 -3.70%Long EUR USD 13-Jan-11 "13:51" 28-Jan-11 "15:37" 1.3267 1.3636 2.78%Short USD PHP (expiry 09May11) 07-Feb-11 "11:07" 07-Apr-11 "05:57" 43.5900 43.0900 1.16%Long EUR TRY 09-Feb-11 "09:06" 12-Sep-11 "17:00" 2.1620 2.4349 9.04%Short EUR&USD RUB 01-Mar-11 "12:50" 19-Apr-11 "17:09" 33.6800 33.8472 -0.49%Long EUR USD 18-Mar-11 "10:06" 23-Sep-11 "17:00" 1.4085 1.3517 -4.03%Short USD MYR (expiry 29Mar12) 31-Mar-11 "01:58" 04-Aug-11 "21:36" 3.0660 3.0270 1.29%Short USD PHP (expiry 04Apr12) 07-Apr-11 "05:57" 04-Aug-11 "21:36" 43.1300 42.7300 0.94%Short MXN CLP 06-Jun-11 "12:22" 10-Aug-11 "17:09" 39.9703 38.2700 4.44%Long AUD JPY 29-Jun-11 "09:03" 18-Jul-11 "17:00" 85.7802 83.5749 -2.57%Long Basket (NZD, RUUSD 10-Aug-11 "14:20" 14-Sep-11 "17:00" 100.0000 97.7400 -2.26%Short USD, EUR SGD, MYR 18-Oct-11 "00:11" 01-Jan-12 "00:00" 100.0000 99.0000 1.01%Short AUD JPY 31-Oct-11 "16:02" 02-Nov-11 "16:34" 82.7092 80.7573 2.42%Long RUB HUF 09-Nov-11 "11:16" 06-Dec-11 "17:00" 7.4200 7.1550 -3.57%Short USD, EUR SGD, MYR 01-Jan-12 "00:00" 18-Jan-12 "12:36" 99.0000 97.1702 1.88%Short USD MXN 25-Jan-12 "20:17" 15-Feb-12 "13:35" 13.0300 12.7387 2.29%Short USD CAD 25-Jan-12 "20:17" 10-Feb-12 "17:00" 1.0056 1.0016 0.40%

Long EUR USD 25-Jan-12 "19:43" 15-Feb-12 "13:35" 1.3059 1.3086 0.21%

Short GBP NOK 22-Feb-12 "18:15" 08-Mar-12 "16:30" 8.8685 8.8424 0.30%

Description Open Close

Our Recommended Top Trades for 2012Trade Opened At Now At

1. Close protection on the iTraxx Europe Xover Index 30-Nov-11 759 n/a -3.4 %

2. Close short 10-yr German Bunds 30-Nov-11 2.28 n/a -3.5 %

3. Long EUR/CHF 30-Nov-11 1.23 1.21 -1.97 %

4. Long S&P TSX vs Nikkei, FX unhedged 30-Nov-11 100 94.7 -5.30 %

5. Long CNY, MYR vs GBP, USD 30-Nov-11 100 102.54 2.54 %

6. Close long July 2012 ICE Brent Crude Oil Futures 30-Nov-11 107.80 n/a 11.6 %

Potential Gain

ii


March 2012

Feature Carry and the Yen move – Fade or Follow?

Since the beginning of the year, FX carry strategies have had a very good run. More recently, even the Yen—historically one of the prime funding currencies for FX carry strategies—has started to depreciate notably. These developments raise the question of whether carry is back and whether the recent moves could be the beginning of a new multi-year uptrend. We look at the evidence and find little indication of a change in the underlying fundamentals so far. Instead, continued gains in carry strategies are still likely to depend mainly on broader risk sentiment. More specifically on the Yen, we continue to believe that most of underlying appreciation forces remain in place and we are particularly suspicious of sudden Yen moves around fiscal year-end. However, before shifting too quickly into the ‘fade’ camp, we have to acknowledge the potentially important recent policy shift by the BoJ. The price action around the next BoJ meeting and the beginning of the new fiscal year will be particularly interesting. Lastly, we take a more detailed look at the NOK, which in many respects seems to be following a pattern that is more customary in Asia. We see the potential for significantly more NOK strength in the near future, which is reflected in our new forecasts.

1. How FX Carry Works in Theory FX carry strategies are based on the so-called forward rate bias, which is a violation of uncovered interest rate parity (UIP). On average, significant returns could be earned over long periods of time in the past simply by investing in high-yielding currencies, funded out of low-yielding ones. In a more technical sense, the high-yielding currencies did not depreciate as much as UIP would have suggested.

Many FX carry strategies are implemented in more or less sophisticated baskets, such as our own investable FX Carry Index, which has recently been revamped to reduce transaction costs (BBG ticker GSIMCAR1).

Since the beginning of the year, these simple FX carry strategies have been performing well, recovering fully the losses accumulated in 2011, as can be seen in the chart. For example, our GS Carry Index has posted a total return of about 3.5%, with a high Sharpe ratio and virtually no pullback. This has been the best performance window since early 2009, when FX carry strategies rebounded from the 2008 slump.

Thomas Stolper [email protected] +44 (0)20 7774 5183 Robin Brooks [email protected] +1 (212) 902 8763 Themistoklis M. Fiotakis [email protected] +44 (0)20 7552 2901 Fiona Lake [email protected] +852 2978-6088 Constantin Burgi [email protected] +44 (0)20 7051 4009 George Cole [email protected] +44 (0)207552 3779

Summary and Key Points The beginning of the year has seen strong performance in FX carry strategies. We look at the drivers and conclude that this mainly reflects an improvement in risk sentiment, rather than a fundamental shift back towards a more carry-supportive environment. The recent strong rally in $/JPY surprised given that most fundamentals remain firmly Yen-supportive. Also, the Yen tends to display sudden trend reversals around fiscal year-end in Japan, which would support our bias to ‘fade’ the recent move. But the recent BoJ shift may be important and warrant a change in view. Much will depend on the BoJ’s determination and the response to additional policy easing in fixed income markets. We look at Norway (and the NOK), which increasingly seems to follow the pattern of Asian ‘surplus’ countries. Given rising appreciation and inflation pressures and low interest rates, this creates scope for further NOK appreciation.

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A Rebound in FX Carry after a Difficult 2011

Source: GS Global ECS Research

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March 2012

Such a period of strong carry returns always raises the question of whether FX carry could again become a major investment theme. Back in the years leading up to the Global Financial Crisis (GFC), diversified carry strategies delivered some of the highest Sharpe ratios of any investment strategy. A revival of FX carry would therefore be an important development for FX investors.

There is a considerable body of academic research about carry strategies and the violation of UIP, but relatively little has been said so far about the reasons why carry has performed so badly in recent years. Depending on implementations, total returns have been close to zero since 2007 in most cases. As a starting point, we describe some key characteristics that drive carry returns and why.

Most simple FX carry implementations start with a basket of currencies on the long side and another bunch of currencies on the funding side. These strategies typically perform well in the following broadly defined situations:

When the average interest rate differential between the high-yielding and the low-yielding currencies is relatively high, as this represents the primary source of returns. In the most basic description of carry returns, one can assume that spot exchange rates follow a random walk, which means that on average the return will be close to the interest rate differential between these two currencies.

When the high-yielding currencies appreciate relative to the low-yielding ones (a strong violation of UIP). In this case, a second source of return, spot appreciation, will be added to the gains from the interest rate differential.

When the correlation among the basket constituents is relatively low. This helps the diversification of idiosyncratic risks and hence increases risk-adjusted returns of carry strategies.

When the correlation between currency moves and broader risky asset returns are low, as this reduces the likelihood of market-wide risk aversion swings affecting the risk-adjusted returns of the strategy.

There is some overlap between these loosely defined conditions but each of them can be tracked relatively easily.

2. Many Headwinds for FX Carry Strategies Remain Taking the criteria introduced in the section above one by one, we can only conclude that the broader situation remains very unfriendly for FX carry.

Interest rate differentials remain low across the globe. If anything, central banks seem to be engaging in a kind of competitive easing, as discussed by Kamakshya Trivedi and Stacy Carlson in a recent Global Economics Weekly. This is also partly an attempt to prevent

currencies from appreciating in response to easing by other countries, in particular the mature but debt-ridden developed economies. In recent months, the Fed, BoE, ECB and BoJ have all engaged in additional non-conventional easing. Many central banks in smaller developed countries and emerging markets (EM) were obliged to follow, unless they were willing to engage in some form of ‘macro-prudential’ capital controls or intervention to prevent their currencies from excessive appreciation. The latest measures by Brazil are an excellent example of how the carry potential is being eroded by central bank rate cuts in combination with tighter capital controls.

Even from a slightly forward-looking perspective, when looking at 2-yr swap rates, the overall level of rates remains low in most countries, with few expectations of future tightening. Moreover, the cross-sectional standard deviation of interest rates also remains at levels close to the post-GFC lows (see chart). Simply put, interest rate differentials are small across the world, which means that the primary driver of carry returns in the long run remains very subdued.

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Cross Sectional Standard Deviation Remains at Levels Close to Post-GFC Lows

Std Devn of 2Y Swap RatesAverage of 2Y Swap Rates

Source: Bloomberg, GS Global ECS Research

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% Hypothetical return of shorting $/TRY via 1-year forwards


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March 2012

The second issue above, additional spot returns, is easy to benchmark given that, on average, total returns on carry strategies have been almost perfectly flat since 2007. Although there have been periods of outperformance, there have also been comparable stretches of underperformance. On average, the negligible total returns suggest that higher-yielding currencies have depreciated sufficiently, while lower-yielding ones have appreciated, erasing all positive returns from interest rate differentials. One could even go as far as to assert that UIP actually did hold in recent years. Even at the country level, this is true for some of the higher-yielding currencies. In the chart on the previous page, we plot the potential percentage return from buying the Turkish Lira against the USD via a 1-year forward and holding it to expiry. Starting right after the last Turkish financial crisis in 2001, total returns would have been exceptionally high, at times reaching more than 100%. However, since 2008, potential losses have been about as frequent as gains in the +/-20% range. On average, the spot moves in the Lira have fully offset any gains from higher interest rates.

The correlation between currencies has also remained very high on our measures. It is not particularly easy to measure the cross currency correlation among the 30-odd liquid currency pairs, as there are around 200 possible cross rates that one could compare. Depending on the specific choices, very different correlation patterns may emerge. To tackle this issue in the past, we have simply looked at the correlations of trade-weighted exchange rates to some third factor, typically some measure of market risk. If all currencies respond similarly to the risk factor, they are likely also highly correlated among each other. The chart shows the average correlation in daily returns of the G10 and the most liquid EM currencies with US stock markets. Given that we are not interested in the direction of this correlation but rather its strength, we remove the sign and use the average ‘absolute’ correlations. As can be seen, these have been persistently high since the GFC; hence, we think it is unlikely that the construction of a broad carry basket offers any major diversification benefits. Most currency moves seem to be the result of systemic risks.

Finally, with individual currencies highly correlated with each other and given broader risk sentiment, it is not unexpected that diversified FX carry strategies also have a high correlation to risky assets. Indeed, the daily return correlation between FX carry and the SPX remains at high levels at around +40%, which is close to where it has been since the GFC. As a benchmark, before the crisis started in 2007/08, the same correlation typically oscillated around the +10% mark.

After analysing all these related indicators, we conclude that the recent rally in FX carry was probably no more than a correlated reaction to the improvement in broader risk sentiment. The forward-looking implication is that the recent FX carry rally can only continue if the broader risk rally continues with little pullback.

Alternatively, a broader shift back into a carry-favourable regime, similar to the pre-crisis period, would also help. However, this would imply that a number of central banks would have to tighten monetary policy to raise interest rate differentials, which will take time. Cross asset correlations would have to become smaller, too. So far, there is little evidence of this happening, as our charts suggest. But that doesn’t mean the situation couldn’t change soon. We will watch our indicators closely.

3. Carry, the BoJ and the Yen After months of debating the latest twist in the ongoing Euro area crisis, a sudden BoJ-induced move in the Yen was a welcome distraction for many in FX markets. And, as we have already seen several times in recent years, a sharp move higher in $/JPY triggers market speculation about the fundamentals finally changing.

Memories of high carry returns funded out of the Yen may be a factor as well, in particular if—as we discussed above—FX carry seems to be experiencing a superficial revival. As in the previous section, ‘fade or follow’ would seem to be the key question.

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FX-Risky Asset Correlation Remains Exceptionally High

Average of abolute return correlation* between G10 currencies and the S&P500

Average of abolute return correlation* between EM currencies and the S&P500

Source: GS Global ECS Research; *255 day correlation

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IndexCorrelation Between FX Carry Strategies

and SPX Remains High

Correlation* between FX Carry Basket and SP500 (lhs)

FX Carry Basket (rhs)

Source: GS Global ECS Research; *255 day correlation

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March 2012

Perhaps the easiest way to approach the issue is simply to summarise what has changed and what has not. We start with the JPY factors that have changed recently:

The most important factor is that the BoJ has recently become more dovish. A redefinition of the inflation target and a stronger commitment to reach this target faster via increased asset purchases marks a significant departure from past policy—at least by Japanese standards.

Japan also experienced a substantial deterioration in the trade balance, which moved into deficit in 2011 for the first time since the early 1980s at least on a calendar year basis.

The combination of a trade deficit and easier monetary policy appear, on the surface, to reflect a substantial deterioration in the factors that have supported the JPY in the past. However, the situation remains much more complex, and so far it is far from clear if the JPY fundamentals have really changed that much. We would highlight the following points, largely based on earlier analysis by Fiona Lake and our Japanese Economics team:

A large part of the deterioration in the trade balance appears to be of temporary nature, linked to global demand weakness and the disruptions from the earthquake as well as the floods in Thailand. Relocation of production to other countries with cheaper and more abundant labour has also played a role. However, the income balance remains strong and has improved notably recently, along with the deterioration in the trade balance. Overall, the current account position of Japan is likely to remain in solid surplus, as our Japanese colleagues have also argued.

The degree of conviction conveyed by the BoJ leadership through its actions and communications has so far been slightly unclear. With regards to the change in the BoJ’s stance, the fact that bond

purchases have been concentrated at the very front end of the yield curve so far has reduced the effectiveness of QE. Moreover, the BoJ has remained substantially behind the asset purchase targets, which also suggests a lack of conviction. Without a more convincing implementation of asset purchases and front-loaded purchases of longer maturity bonds, the JPY impact may remain quite limited.

However, even if the BoJ became fully committed to more aggressive QE, the BoJ would still be at risk of being ‘out-eased’ by the Fed. Although growth has been surprising on the positive side in the US recently, we still expect the Fed to ease more via a new program of non-conventional policies to kick in after the ongoing ‘Operation Twist’. Further strong activity data in the US could change this, but for now there are no reasons to change our Fed forecast.

In that respect it is interesting to note that $/JPY has moved far ahead of essentially unchanged rate differentials. For example, if we look at 5-yr rate differentials, BoJ QE would need to push 5-yr swap rates down from currently slightly less than 50bp to almost zero in order to bring the rate differential in line with the current spot rate above $/JPY 80.

Foreign official investors continue to like the put more Yen into their FX reserves. The regular IMF COFER data shows that over the last couple of quarters the share of JPY-allocated FX reserves has been growing steadily. Historically, the low interest rates in Japan have probably been a hurdle to a larger allocation, but with European and US interest rates now at comparable levels the opportunity cost of holding JPY-denominated bonds has gone down. From a pure diversification point of view, a larger Yen allocation appears to be a rational choice, and without any monetary policy tightening expected in the rest of G3 a continued increase in JPY reserve allocations should not be ruled out.

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A Sharp Move Higher in $/JPY since February

JPY spot (lhs)


$/JPY

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JPY Bn Trade Balance Deteriorates but Income Balance Improves Notably

Current Account BalanceNet Portfolio Investment IncomeNet Direct Investment Income

Source: Bank of Japan/ Ministry of Finance/ Haver Analytics/ GS Global ECS Research

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March 2012

With rate differentials failing to correlate with the recent spot move, the search for alternative explanations points to speculative long positioning in $/Yen. Our latest GS Sentiment Index (see page 39) suggests that $/JPY positioning is now longer than at most times over the last two years, and probably stretched. This would also imply that unwinding of these positions could lead to a notable Yen rally.

Returning to a point made above, risky asset correlations remain quite strong, and hence it is quite likely that the continued rally in cyclical assets has helped $/JPY higher.

Lastly, it is important to signal that Japan is approaching fiscal year-end, a period that has historically seen strong seasonal trends. When we have analysed this phenomenon in the past, $/Yen displayed the strongest trends, regardless of direction, in March. And in the last three years these trends have seen JPY weakness of comparable magnitude into fiscal year-end, only to reverse into JPY strength straight after the beginning of the new fiscal year in April.

Overall, most factors point to a likely reversal of the recent JPY move, and in that respect the ‘follow or fade’ question would be relatively easy to answer.

However, we also have to recognise that the BoJ policy shift is potentially a very important event, as also highlighted by our Japanese colleagues. With the situation remaining fluid and with fiscal year-end still a few weeks away, we want to remain open-minded to the possibility that a more substantial change has taken place with regard to the JPY. In that respect, March 13 will be a key date as both the BoJ and the FOMC announce their monetary policy decisions. Any signs of continued reluctance by the BoJ to engage in more aggressive QE would strengthen our preference for the ‘fade’ camp. The same applies for a dovish FOMC.

The ultimate litmus test will likely be interest rate differentials on longer maturities. If they catch up with the recent move, $/JPY may have more upside.

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US$/YENIndex US$/YEN vs GS Sentiment Index

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% oftotal

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* Developing Nations, Source: IMF, GS Global ECS Research

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IndexRally in Cyclical Assets may Have Helped $/JPY higher

JPY spot (lhs)S&P 500 (rhs)


$/JPY

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March 2012

4. Norges Bank in the ‘Asian’ Corner The following scenario is very much the standard case for most Asian surplus countries:

Currency appreciation is continuously resisted by a combination of rather accommodative monetary policy and ongoing FX interventions. Every now and then, however, inflation starts to materialise, including in asset prices, which then triggers concerns for the monetary authorities. In practice, we often see Asian ‘surplus’ countries tolerate more nominal appreciation during these periods of higher inflation and strong growth. But history has shown that many Asian currencies ONLY appreciate in these circumstances.

The same dynamics seem to be at play in Norway currently. Intervention is being conducted on behalf of the ‘Petroleum Fund’ (Government Pension Fund—Global) to neutralise the revenues from oil exports. As Lasse Nielsen has highlighted, growth is accelerating, as evident in strong positive surprises from business surveys and industrial production. Moreover, years of low real rates have led to continued property price increases, with

prices now well above pre-crisis levels, as can be seen in the chart. Unsurprisingly, this credit-driven rise in house prices also led to rather high levels of household indebtedness. Key measures of inflation also point to the upside. And, in response to the Euro area crisis, Norges Bank has already cut rates aggressively—by 50bp in December.

The situation now looks very much like the typical Asian appreciation case. Without much scope to ease further and concerns about asset and goods prices, the logical conclusion would be to allow the currency to appreciate. This is already happening to some extent but we think there is more scope for appreciation and hence we have strengthened our already bullish NOK forecasts. We now see EUR/NOK at 7.30, 7.20 and 7.20 in 3, 6 and 12 months. Indeed, the trading range for our forecasts could easily reach 7.00, so there is potential for an even larger ‘Asia-type’ move in the Nokkie.

We are also adjusting our EUR/SEK forecasts to reflect recent strength but see much less upside for the Swedish Krona than for its Norwegian cousin.

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Index Low Real Rates Have Led to Continued Property Price Increases

Norway House Price Index


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Another Temporary Fiscal Year End Rally for $/JPY?

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EUR/NOK


€/NOK

New FX Forecasts

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EUR/NOK 7.30 7.20 7.20 7.70 7.70 7.60

EUR/SEK 8.80 8.70 8.60 9.00 8.90 8.80

EUR/CZK* 25.00 25.50 24.25 27.50 27.00 25.50

EUR/HUF* 315 315 325 340 350 320

EUR/PLN* 4.25 4.10 4.10 4.80 4.70 4.30

$/RUB 28.9 28.2 27.4 28.8 28.0 27.4

$/CNY 6.27 6.22 6.10 6.28 6.24 6.12

$/ARS 4.50 4.80 5.20 4.45 4.70 5.20

$/BRL 1.70 1.70 1.75 1.80 1.85 1.90

*Forecast changes released since our last FX Monthly was publishedSource: GS Global ECS Research

New Forecasts Old Forecasts

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March 2012

G3 US Dollar FX Forecasts: We maintain our EUR/$ forecast at 1.33, 1.38 and 1.45 in 3, 6 and 12 months respectively. Our $/¥ forecast is unchanged at 77.0, 76.0 and 74.0. Current GSDEER for EUR/$: 1.20; $/¥: 105.7.

Motivation for Our FX View: Since early February, the USD trade-weighted index has remained broadly flat. And in the near term, until more of the Euro area risks are resolved, we could see renewed bouts of USD strength. But in the medium and longer term, broad Dollar weakness remains our core view. Underpinning our Dollar-bearish views are the structural, large twin deficits that will likely persist. The overall monetary stance of the US is also one of the easiest in the world following 'Operation Twist' last September and given the likelihood of QE3 this year. In addition, the accommodative policy in the majors should eventually prove supportive for risky assets and bearish for the Dollar.

Monetary Policy and FX Framework: The Fed has a dual growth and inflation target. As a result, monetary policy has generally been more volatile and reactive than in pure inflation-targeting countries. The exchange rate floats freely. The US Treasury is in charge of FX policy, although the Fed occasionally comments on currency issues too.

Growth/Inflation Outlook: We expect real GDP growth to be around 1.9%qoq ann in Q1, as the strong contribution of inventories to the 3.0%qoq ann growth in Q4 is likely to fade. Also, consumer spending has decelerated and the data flow was more mixed recently. We see considerable spare capacity in the economy, which underpins our view of a deceleration in core inflation.

Monetary Policy Forecast: At the January meeting, the FOMC remained dovish despite the stronger data recently and published its forecast for the Fed Funds rate. The projections show that the Fed intends to keep rates close to zero through the end of 2014. The FOMC continued to highlight the slack in the economy and slowing inflation, and we expect further easing through outright asset purchases in 1H2012.

Fiscal Policy Outlook: Over the next few years, the US will need to undertake fiscal tightening of at least 6% of GDP. We expect only a modest fiscal tightening in the near term and most is likely to take effect after the presidential elections.

Balance of Payments Situation: The US BBoP deficit has narrowed sharply to -0.9% of GDP in Q3, reflecting to a large extent the record level of foreign buying of US treasuries in August. The current account deficit narrowed marginally to 2.9% of GDP in Q3, but we expect it to widen again in coming months.

Things to Watch: The pace of the US cyclical recovery remains key to monitor given the implications for the relative monetary stance and also for overall risk sentiment. In addition, we continue to monitor capital flow trends in the monthly TIC data for signs of any persistent improvement in the BBoP, and the fiscal and monetary policy announcements.

Fiona Lake and Constantin Burgi

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% of GDP4qtr avg US: BBoP vs. Current Account

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Source: Haver Analytics, National Source, Global ECS Research.

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EUR/$

Spot

GSDEER

2


March 2012

US Dollar

86889092949698

100102104106108110112

90 92 94 96 98 00 02 04 06 08 10 12

Index1990=100 US Terms of Trade

TOTImprovement

-24-20-16-12-8-4048

12162024

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

% yoy 3-mth ma

US Trade Volumes

ExportsImports

-15

-10

-5

0

5

10

15

90 92 94 96 98 00 02 04 06 08 10 12 14

%yoy US Industrial Production and real GDP

Industrial Production

Real GDP

F'cast

-3

-2

-1

0

1

2

3

4

5

6

92 94 96 98 00 02 04 06 08 10 12 14

%yoy US Inflation

G10 Inflation

US CPI

F'cast

0

100

200

300

400

500

600

700

800

900

1000

0

100

200

300

400

500

600

00 01 02 03 04 05 06 07 08 09 10 11 12

IndexIndex GS Commodity Indices

S&P GSCI® Energy IndexS&P GSCI® Industrial Metal IndexS&P GSCI® Agriculture IndexS&P GSCI® Index (rhs)

700

800

900

1000

1100

1200

1300

1400

1500

1600

0

1

2

3

4

5

6

7

99 00 01 02 03 04 05 06 07 08 09 10 11 12

Index% FED rate vs. 10y yield and S&P500

UST 10y yieldFED funds rateSPX (rhs)

3


March 2012

Euro

0.50

0.70

0.90

1.10

1.30

1.50

1.70

81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13

EUR/$

Spot

GSDEER

FX Forecasts: We maintain our EUR/$ forecast at 1.33, 1.38 and 1.45 in 3, 6 and 12 months respectively. EUR/¥ is at 102.4, 104.9 and 107.3. Current GSDEER for EUR/$: 1.20.

Motivation for Our FX View: Since late January, the Euro has been broadly flat against the USD, with the second LTRO and stronger data supporting the EUR, and the uncertainties regarding the Greek PSI (which are yet to be fully resolved) pulling in opposite directions. The Euro may thus remain volatile in the short term, before strengthening as per our medium- and long-term views. The key driver of our view is that FX markets will remain dominated by broad Dollar weakness, particularly on the back of the weakness of the US external balance. The Euro area BBoP remains strong on a trend basis, whereas the US has recorded large deficits for some time. A gradual further decline in the Euro area fiscal risk premium should boost the Euro. These factors should enable the Euro to trade strongly relative to 'fair value' for a protracted period.

Monetary Policy and FX Framework: The ECB is a strict inflation targeter. As a central bank serving 17 countries, the ECB is arguably the most independent central bank in the world. The Euro is a freely-floating currency. FX policy responsibility is not clearly defined, but in practice the ECB is unlikely to act in FX markets without Eurogroup approval.

Growth/Inflation Outlook: The Euro area manufacturing PMI increased marginally in February to 48.9; this compares with the February US ISM decrease to around 52.4. Euro area business surveys suggest upside risks to our current GDP forecasts and we expect Q1 GDP to come in at -0.3%qoq. For the entire year, we forecast -0.4% real GDP growth in 2012 followed by 0.7% in 2013. We see inflation falling to 1.8% in 2012 from 2.7% in 2011 and to 1.5% for 2013 as the food and energy contribution declines.

Monetary Policy Forecast: The ECB left rates unchanged at 1.00% in March and specified that while there are tentative signs of stabilisation, downside risks to activity prevail. The inflation risks remained broadly balanced. We think the ECB will keep rates at 1.00% through 2013.

Fiscal Policy Outlook: Many governments in Europe are heading into substantial fiscal consolidation, which is likely to prove a drag on growth. However, the relative fiscal positions between the Euro area and the US are what matters for the EUR/$, and the US also faces large adjustment needs of its own, which have not yet been addressed.

Balance of Payments Situation: The Euro area runs a small current account deficit, which is fully financed by net FDI and net portfolio flows on a trend basis, leading to a quite positive BBoP.

Things to Watch: Developments in the European Sovereign Situation, in particular the outcome of the Greek PSI deal.

Fiona Lake and Constantin Burgi

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

98 00 02 04 06 08 10 12

% GDP12-mma

Euro area: BBoP vs Current Account

CA

BBoP

4


March 2012

Euro

80

85

90

95

100

105

110

115

120

125

130

90 92 94 96 98 00 02 04 06 08 10 12

Index2000=100

Euro area Terms of Trade

TOTImprovement

-24

-20

-16

-12

-8

-4

0

4

8

12

16

20

01 02 03 04 05 06 07 08 09 10 11 12

% yoy 3-mth ma

Euro area Trade Volumes

ExportsImports

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

-3

-2

-1

0

1

2

3

06 07 08 09 10 11 12

EUR/$% EUR/$ vs 2-yr Rate Differential

2-yr Germany Swap Minus 2-yr US SwapEUR/$ (rhs)

-20

-15

-10

-5

0

5

10

90 92 94 96 98 00 02 04 06 08 10 12 14

%yoy Euro area Industrial Production and real GDP

Industrial Production

Real GDP

F'cast

-3

-2

-1

0

1

2

3

4

5

92 94 96 98 00 02 04 06 08 10 12 14

%yoy Euro area Inflation

G10 Inflation Euro area CPI

F'cast

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

08 09 10 11 12

Vol EUR/USD: 3-mth Risk Reversals

5


March 2012

Japanese Yen

50

100

150

200

250

300

81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13

$/¥

Spot

GSDEER

FX Forecasts: Our views have not changed. We continue to expect $/JPY to trade at 77, 76 and 74 in 3, 6 and 12 months. EUR/¥ is 102.4, 104.9 and 107.3. The current $/¥ GSDEER is 105.7 and EUR/¥ is 126.6.

Motivation for Our FX View: JPY has depreciated by about 6% against the USD since early February, with the bulk of the move generated by a surprise easing move from the BoJ at the February meeting, which included a firming of the commitment to 1% inflation in the medium term. At this point we would be inclined to fade this weakness unless there is further, more aggressive easing from the BoJ. Our view is based on our expectation of further QE from the Fed, the fact that Japan continues to run a more positive external balance than the US and that positioning in USD/JPY appears to be rather long. Further reserve diversification into the Yen would also be supportive.

Monetary Policy and FX Framework: The BoJ has effectively shifted back to a zero interest rate policy. The Yen is formally a freely floating currency, but the MoF is in charge of FX policy and has often intervened in the past. Since September 2010, there have been several examples of bilateral intervention, as well as the post-earthquake co-ordinated intervention.

Growth/Inflation Outlook: While the Japanese economy has recovered more strongly than expected from the March earthquake, it faces the challenge of a slower global environment over the next 6 months and beyond. This will weigh on export performance, as will the strength of the Yen. We now expect growth to be 2.0% in FY2012, with public-sector demand offsetting the global slowdown. We expect growth to be 1.8% in FY2013, a fairly strong print, which is likely to be helped by the frontloading of demand ahead of a potential consumption tax hike in 2014. We expect inflation to turn positive in 4Q2012, but price pressures are likely to remain mild.

Monetary Policy Forecast: The BoJ increased, and extended to end 2012, its Asset Purchase Program by JPY10trn to JPY65trn on February 14, probably due to an ongoing dovish Fed and domestic political pressure. For the Yen to remain weak, the BoJ is likely to need to extend its recent easing further. As yet, progress on the asset purchase program remains slow.

Fiscal Policy Outlook: Japan has introduced several rounds of supplementary budgets after the earthquake, totalling a touch above 4% of GDP. A consumption tax hike is being debated for 2014 to stabilise the worrying debt trajectory.

Balance of Payments Situation: Japan continues to run a BBoP surplus on the back of a current account surplus, which is dominated by a positive income balance. Unlike in other countries, bond outflows in recent years have typically coincided with Yen strength.

Things to Watch: Any further aggressive policy action from the BoJ/Japanese government. Any increased focus on the Japanese fiscal and debt levels, particularly if question-marks over unsustainability start to emerge more forcefully.

Fiona Lake

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

% GDP12-mma

Japan: BBoP vs Current Account

CA

BBoP

6


March 2012

Japanese Yen

50

60

70

80

90

100

110

120

130

140

150

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Index2000=100

Japan Terms of Trade

TOTImprovement

-50

-40

-30

-20

-10

0

10

20

30

40

50

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

% yoy 3-mth ma

Japan Trade Volumes

Exports

Imports

75

80

85

90

95

100

105

110

115

120

125

-2

-1

0

1

2

3

4

5

6

7

8

06 07 08 09 10 11 12

$/JPY% $/JPY vs 2-yr Rate Differential

2-yr US Swap Minus 2-yr Japan Swap$/JPY (rhs)

-3

-2

-1

0

1

2

3

4

5

92 94 96 98 00 02 04 06 08 10 12 14

%yoy Japan Inflation

G10 Inflation

Japan CPIF'cast

-40

-30

-20

-10

0

10

20

30

40

-15

-10

-5

0

5

10

15

90 92 94 96 98 00 02 04 06 08 10 12 14

%yoy%yoy Japan Industrial Production and real GDP

Real GDP

Industrial Production (rhs)

F'cast

-12

-10

-8

-6

-4

-2

0

2

08 09 10 11 12

Vol USD/JPY: 3-mth Risk Reversals

7


March 2012

Europe, Middle East & Africa British Pound FX Forecasts: We maintain our EUR/GBP forecasts at 0.87 in 3, 6 and 12 months. Given our EUR/$ forecasts, this translates into GBP/$ at 1.53, 1.59 and 1.67 in 3, 6 and 12 months. Current GSDEER for EUR/GBP is 0.79 and for GBP/$ is 1.51.

Motivation for Our FX View: Sterling is trading at a discount to 'fair value' vs the EUR. However, persistently high inflation prints have started to erode GBP valuation. GBP has recently benefited from 'safe haven' flows linked to the Euro area crisis and a broader weakening of the EUR. Therefore, it has overshot our forecast. Cyclically, the consolidation in fiscal policy combined with an accommodative monetary policy stance is typically negative for FX (the BoE eased monetary conditions by increasing asset purchases by GBP50bn over three months). These forces should keep GBP within our flattish forecast path, with the recent strength reversing in the near term. Broader USD weakness should lead to considerable strength in Cable.

Monetary Policy and FX Framework: The Bank of England is tasked with price stability, defined as CPI at 2% over time. If inflation falls below 1% or rises above 3%, the BoE must write a letter of explanation to the Chancellor of the Exchequer. Sterling operates under an entirely free float, although the BoE occasionally comments on exchange rate developments.

Growth/Inflation Outlook: We expect the economy to grow by 1.2% in 2012 (above consensus of 0.5%) and by 2.3% for 2013. The composite PMI fell to 53.6 in February, with both manufacturing and services falling. In January, headline CPI fell sharply to 3.6% as the effect of the 2011 VAT hike faded. We expect inflation to continue to fall in the coming months and average 2.6%yoy in 2012 and 2.0%yoy in 2013.

Monetary Policy Forecast: The BoE extended asset purchases at its February meeting (GBP50bn over three months), due to weak growth and thus considerable easing in inflation pressures. We expect a further easing by GBP50bn in May.

Fiscal Policy Outlook: The government has set out a plan for an 8% of GDP reduction in the structural deficit and 9% of GDP in the primary structural deficit. Three-quarters of the adjustment will occur via spending cuts, while the change in taxes is minor in comparison.

Balance of Payments Situation: We expect further improvements in the current account balance. Our forecast is for an improvement to -1.8% of GDP for 2012 before moving back to -2.3% for 2013, after -2.4% in 2011. Meanwhile, portfolio flows remain notoriously difficult to assess given the large gross cross-border flows linked to London as a financial centre.

Things to Watch: The impact of fiscal policy on final demand and the trajectory of the PMI remain the key factors to watch. A sudden change in the Bank of England's stance would be relevant as well.

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

EUR/£

Spot

GSDEER

Constantin Burgi

-15%

-10%

-5%

0%

5%

10%

15%

20%

91 93 95 97 99 01 03 05 07 09 11

% GDP4-qtr ma

UK: BBoP vs Current Account

CA

BBoP

8


March 2012

Czech Koruna FX Forecasts: We recently revised our EUR/CZK forecasts to 25.00, 25.50 and 24.25 in 3, 6 and 12 months, respectively, from 27.5, 27.0 and 25.5. This implies a USD/CZK forecast of 18.80, 18.48 and 16.72. Current GSDEER for EUR/CZK is 23.09, equivalent to a 7.0% 'undervaluation' against the EUR. USD/CZK GSDEER is 19.28.

Motivation for Our FX View: We expect the Koruna to be supported in the near term by a more positive outlook for the Euro area and its banks, and global liquidity in general. We see a risk that the CZK weakens towards the middle of 2012, on profit-taking and repatriation of FDI income, but a generally strong balance sheet, low stock of external debt and limited reliance on foreign funding should help the Koruna appreciate in 2H2012. Euro area news will continue to affect the Koruna; however, it should remain the least sensitive currency in the CE-3.

Monetary Policy and FX Framework: The CZK is a freely-floating currency. However, since the economy is very open, the CNB monitors FX movements when setting interest rates. The inflation target is 2%.

Growth/Inflation Outlook: Growth is likely to stay below potential in 2012 as the external environment weakens, especially in the Euro area; domestic demand should remain weak because of low consumer sentiment and continued fiscal restraint. We expect inflation to stay above the target for the rest of 2012 following a VAT hike in January, but it should start to decline from 2H2012 onwards; weak domestic demand should reduce other inflationary pressures.

Monetary Policy Forecast: The CNB has kept the policy rate at a record low 0.75% since April 2010, after a total of 300bp in cuts. In the absence of domestically generated inflationary pressures and a weakening growth outlook, the CNB will not respond to the recent inflation jump. However, cuts are unlikely as well, suggesting an even longer 'wait and see' period.

Fiscal Policy Outlook: The three-party government's determination to keep public finances in check and balance the budget in the medium term has been appreciated by investors and rating agencies, and has kept long-term rates well-anchored, leading to a two-notch upgrade by Standard and Poor's in 2012. The ongoing consolidation resulted in a large deficit reduction in 2010 and 2011, but it is affecting consumer sentiment, which was already low following the crisis, and will continue to weigh heavily on domestic demand.

Balance of Payments Situation: The Czech Republic maintains a trade surplus although the income account remains in deficit due to the high repatriation of FDI profits. The current account should therefore stay in deficit in 2012-13, although it should be easily financed with steady FDI and other inflows.

Things to Watch: The economy is highly integrated with the Euro area through trade and financial links, and hence also with the global economy. The growth outlook abroad therefore has direct implications for Czech exports and domestic growth, while the financial standing of Euro area banks has a strong impact on the Koruna outlook. Still, a withdrawal from the country or deleveraging is unlikely, given the strong balance sheets of local banks and ample domestic funding.

10

15

20

25

30

35

40

45

95 97 99 01 03 05 07 09 11 13

EUR/CZK

Spot

GSDEER

Magdalena Polan

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

% GDP4-qtr ma

Czech Rep: BBoP vs Current Account

CA

BBoP

9


March 2012

Hungarian Forint FX Forecasts: We recently revised our EUR/HUF forecasts to 315 in 3 and 6 months and 325 in 12 months, from 340, 350 and 320, respectively. This implies USD/HUF at 236.8, 228.3 and 224.1 in 3, 6 and 12 months. Current GSDEER for EUR/HUF is 288.9, which implies a 2.2% 'undervaluation' against the Euro. USD/HUF GSDEER is 241.2.

Motivation for Our FX View: The HUF will likely remain under pressure in 2012 as the government proceeds with the difficult negotiations with the IMF/EU, and as uncertainties over the eventual outcome persist. Setbacks in negotiations, an escalation of disagreements with the EU, or increased risk that Hungary again loses access to debt markets, could lead to a rapid weakening of the Forint, although the recent improvement in the Euro area outlook and global liquidity could limit the downside risks. An eventual agreement would stabilise the HUF; nevertheless, the Forint will likely remain under sustained depreciation pressure as domestic deleveraging continues and risks to program implementation persist. The Forint will remain vulnerable to domestic political news and changes in global risk appetite. Positive news, such as a lasting solution to the FX debt problem or visible progress in negotiations, would be HUF-positive.

Monetary Policy and FX Framework: The NBH targets inflation at 3% in the medium term (18 months-2 years). The MPC normally holds rate-setting meetings every fourth Tuesday of the month.

Growth/Inflation Outlook: Growth reached 1.4% in 2011, thanks to a recovery in external demand; domestic demand remained depressed. The combination of an external slowdown and further fiscal austerity will likely result in a small 0.5% contraction in 2012. Inflation will stay above the NBH's target until end-2013 as indirect tax hikes, higher energy and fuel prices, and the effects of a weaker Forint drive up inflation.

Monetary Policy Forecast: The NBH hiked rates by 100bp in late 2011 to support the Forint and reduce the risk of capital outflows. We think it may have to hike by 100bp more if negotiations with the EU/IMF stall and the HUF weakens sharply; an eventual agreement should lead to gradual cuts.

Fiscal Policy Outlook: The Fidesz government is implementing structural reforms to stabilise public finances in the long term and plans to follow a restrictive budget in 2012 to counteract weakening growth as it aims to meet an ambitious deficit goal. Long-term fiscal sustainability will be at the core of the eventual IMF/EU agreement but weak growth would likely necessitate a lengthy adjustment.

Balance of Payments Situation: The current account should remain in surplus in 2012-13, but capital outflows are likely to put pressure on the financial account and the HUF. Without additional financing or a new IMF/EU program, Hungary could face a 7%-of-GDP funding gap in 2012.

Things to Watch: Risks of a BoP crisis have increased and Hungary needs another sizeable IMF/EU deal to secure substantial external financing. But the negotiations will be difficult as the government tries to minimise the conditionality associated with another program, and the recent improvement in risk sentiment reduces the urgency to secure a credible program.

80

110

140

170

200

230

260

290

320

95 97 99 01 03 05 07 09 11 13

Spot

GSDEER

EUR/HUF

Magdalena Polan

-15%

-10%

-5%

0%

5%

10%

15%

20%

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

% GDP4-qtr ma

Hungary: BBoP vs Current Account

CA BBoP

10


March 2012

Israeli Shekel FX Forecasts: We maintain our 3-, 6- and 12-month $/ILS forecasts at 3.70, 3.70 and 3.60. This implies €/ILS at 4.92, 5.11 and 5.22 in 3, 6 and 12 months. The current $/ILS GSDEER is 4.09 and €/ILS GSDEER is 4.90.

Motivation for Our FX View: We have consistently held constructive ILS views over the past few years. However, a widening current account deficit and slowing growth should cap the upside on the ILS in the short term. Over the medium run, we expect moderate appreciation, on the back of stronger growth and a widening of interest rate differentials in favour of the ILS.

Monetary Policy and FX Framework: The Bank of Israel enjoys operational independence and targets inflation of 1%-3%yoy. Previously, on the MPC's recommendation, the governor set the policy interest rate with a view to keeping inflation within the target band. From October 2011 onwards, the MPC started setting policy rates.

Growth/Inflation Outlook: Domestic financial conditions remain supportive of growth, and headline inflation is now running below the BoI's 3% upper target boundary. However, with tighter external financial conditions and weaker demand in Israel's main export markets, we see growth falling to 2.8% in 2012, from 4.8% in 2011. Low direct exposure to the Euro area, a strong balance sheet structure and monetary policy accommodation should all help to keep Israeli growth fairly resilient to the Euro area crisis. However, as one of the smaller and more open economies in CEEMEA, developments in global demand conditions will continue to have a strong bearing on the growth outcome in Israel. For now, most indicators continue to point to weakening domestic and external growth, but we continue to expect a fairly strong sequential recovery over 2H2012.

Monetary Policy Forecast: As a result of the improved domestic inflation outlook (thanks to more favourable base effects, a widening output gap and cuts in regulated prices), and previous policy tightening, the BoI had room to ease going into late 2011. Addressing slowing global growth and rising uncertainty over the situation in the Euro area, the Bank has cut rates by 75bp since September. We now expect rates to remain on hold for most of 2012, and from 4Q2012 we see the beginning of a 'normalisation cycle', with cumulative rate hikes taking the policy rate to 4.5% by end-2013. That said, a further slowdown would indicate the risk of further rate cuts and/or a later start to the 'normalisation' cycle.

Fiscal Policy Outlook: The budget deficit widened to 4.5% of GDP in 2009, due mainly to the economic slowdown. However, the government has taken a number of corrective measures and, as the economy recovers from recession, the nominal deficit should fall to around 2.5% of GDP by 2012.

Balance of Payments Situation: The current account surplus has narrowed substantially, to 0.9% of GDP in 3Q2011, consistent with previously robust domestic investment. Slowing external demand now poses additional downside risks, although domestic demand is also slowing and the domestic savings rate remains quite high.

Things to Watch: Ongoing political developments across MEAN, including the situation in Iran, are relevant for Israel and should be monitored closely.

3.0

3.2

3.4

3.6

3.8

4.0

4.2

4.4

4.6

4.8

5.0

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

$/ILS

Spot

GSDEER

Ahmet Akarli

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

% GDP4-qtr ma

Israel: BBoP vs Current Account

CA

BBoP

11


March 2012

Norwegian Kroner FX Forecasts: We are revising our EUR/NOK forecasts to 7.30, 7.20 and 7.20 from 7.70, 7.70 and 7.60 in 3, 6 and 12 months respectively. This equates to 5.49, 5.22 and 4.97 for the USD/NOK rate. The NOK looks 'cheap' vs the Euro at current levels, according to our GSDEER valuation of 5.65, reflecting Norway's terms-of-trade gains. However, because Norway keeps the bulk of its oil revenues offshore, the Norwegian Kroner is unlikely to erode this undervaluation substantially.

Motivation for Our FX View: Since early February, EUR/NOK has moved lower on the back of the sharp oil price increase. We expect the NOK to strengthen further on the back of Norway's relative growth and external balance positions. If risk aversion rises rapidly again, the NOK could potentially strengthen sharply as a 'safe haven'. Norges Bank is likely to be uncomfortable with this and could become more dovish to temper currency appreciation.

Growth/Inflation Outlook: Norwegian Q4 (mainland) GDP printed at +0.6%qoq, higher than indicated by the surveys (around +0.3%qoq). In 2012 so far, the PMI has rebounded sharply and Norges Bank's Regional Network survey has also shown a robust improvement. Combined, the surveys point to an acceleration to around +0.8%qoq in Q1. January 'hard' data has also improved: manufacturing output expanded by a solid +1.1%mom. The January PMI improved sharply and we expect (mainland) GDP growth to tick up slightly in Q1 to +0.2%qoq. With Brent still elevated, we expect some positive spillover effects for mainland output; our Norwegian forecast remains relatively better than that for Sweden and the Euro area core.

Monetary Policy Forecast: Norges Bank cut the policy rate by 50bp in December. Amid concerns over the Euro area debt crisis, the Bank had turned dovish in August after remaining hawkish in June and hiking in May. While we had expected 50bp of cuts to occur over two meetings, we continue to see the policy rate at 1.75% by end-2012. The key downside risk is a strong NOK; however, this seems to be a result of the strong Norwegian economy, rather than safe haven flows. As such, having already cut 50bp in December, we see limited room for further cuts and we expect hikes to occur in 2Q2013.

Fiscal Policy Outlook: The fiscal spending rule aims to limit the use of oil revenues to the return on the Government Pension Fund-Global. The 2012 budget shows a small easing of fiscal policy of around 0.3% of GDP.

Balance of Payments Situation: As the world's fifth-largest oil exporter, Norway enjoys a healthy current account surplus due to oil exports; the increase in oil prices has raised the current account surplus from 11.2% of GDP to 14.1% in recent quarters. Norway runs a large BBoP surplus due to strong FDI and portfolio inflows.

Things to Watch: Notable NOK appreciation is likely to generate a more voluble response from Norges Bank.

4

5

6

7

8

9

10

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

EUR/NOK

Spot

GSDEER

Fiona Lake and Lasse Holboell W. Nielsen

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

% GDP4-qtr ma

Norway: BBoP vs Current Account

CA

BBoP

12


March 2012

Polish Zloty FX Forecasts: We recently revised our EUR/PLN forecast to 4.25, 4.10 and 4.10 in 3, 6 and 12 months, respectively, from 4.80, 4.70 and 4.30. Given our USD/EUR forecast, this implies USD/PLN at 3.20, 2.97 and 2.83 in 3, 6 and 12 months. Current GSDEER for EUR/PLN is 3.70, indicating an 11% undervaluation against the Euro. USD/PLN GSDEER is 3.09.

Motivation for Our FX View: We expect the Zloty to remain supported in the near term by a more positive outlook for the Euro area and better prospects for external financing. Easier funding for Euro area banks should remain a particularly positive factor. But we see no strong catalysts for a further rally, and see a risk of profit-taking and consolidation at a weaker than current level. Overall solid and stable growth prospects in Poland and more progress on the resolution of the Euro area fiscal crisis should be positive for the Zloty in the medium term but current account deficits and substantial net errors and omissions in the BoP will limit appreciation. The Zloty will remain sensitive to news from the Euro area and global liquidity conditions.

Monetary Policy and FX Framework: The PLN is a freely-floating currency. That said, the NBP intervened to support the Zloty in 2011 and the government sold EU funds in the spot FX market. The capital market is fully liberalised and the NBP maintains an inflation target of +2.5% (+/- 1%).

Growth/Inflation Outlook: The economy grew strongly, at 4.3%, in 2011, supported by domestic demand and rising exports. We expect growth to slow in 1H2012, on an external slowdown and domestic fiscal consolidation, but recover in 2H2012. Headline and core inflation should stay above the NBP's target (2.5% +/- 1%) in 2012, but then start to moderate around mid-year and continue to fall steadily towards the target in 2013.

Monetary Policy Forecast: The MPC hiked policy rates by 100bp in 1H2011. We expect it to remain on hold in 2012 and carefully monitor growth and inflation outlooks, while maintaining a tightening bias. A combination of persistently high inflation and stronger-than-expected growth could even trigger a hike.

Balance of Payments Situation: The current account deficit remained wide in 2011 but fiscal consolidation and weaker growth should bring a small correction in 2012. International reserves are high, around EUR76bn; any tail-risks are limited by the SDR20bn Flexible Credit Line from the IMF, which the government can use in the event of short-term liquidity problems.

Fiscal Situation: The growth slowdown in 2008-09 has led to a significant deterioration in public finances. Following its re-election, the government announced a few important reforms that should help long-term fiscal stability, as well as additional measures to cut the deficits in the next few years to below 3% and avoid crossing the 55%-of-GDP debt threshold. Poland has signed the EU fiscal pact, implying even more tightening in the next few years.

Things to Watch: Poland is heavily integrated with the Euro area through extensive trade and financial links. In addition, the PLN is the most liquid currency in the region, and may respond more markedly to external news.

1.60

2.10

2.60

3.10

3.60

4.10

4.60

5.10

95 97 99 01 03 05 07 09 11 13

EUR/PLN

Spot

GSDEER

Magdalena Polan

-8%

-6%

-4%

-2%

0%

2%

4%

6%

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

% GDP4-qtr ma

Poland: BBoP vs Current Account

CA BBoP

13


March 2012

Russian Ruble FX Forecasts: We roll forward our forecasts for the Ruble to 33.3, 33.0 and 33.0 against the basket in 3, 6 and 12 months. This implies USD/RUB at 28.9, 28.2 and 27.4. The current GSDEER value for USD/RUB is 33.9 and for EUR/RUB is 40.6.

Motivation for Our FX View: We expect oil markets to remain tight. The seasonal current account widening to almost US$35bn in 1Q should therefore continue to support the Ruble in the short term despite ongoing capital outflows. Rollover of external debt in 4Q was above 100% and there are no signs of forced deleveraging. Hence, we expect capital outflows to subside again into 2Q assuming the Euro area continues to stabilise and Russian businesses and consumers gain confidence after the election. This should keep the Ruble well-supported on a 6-month horizon.

Monetary Policy and FX Framework: The monetary policy framework has shifted towards more FX flexibility and a greater focus on inflation (the target is 5%-6% inflation in 2012). The CBR's intervention band against the USD0.55 + EUR0.45 basket is now RUB32.2-38.2. The CBR is attempting to shift towards interest rates as its primary monetary policy tool, and has scaled down its presence in the FX market. To do this, we think the CBR will need to narrow the corridor between its different repo rates and the deposit rates further, and continue to broaden the exchange rate corridor (we think the next widening is likely in April).

Growth/Inflation Outlook: Domestic demand has accelerated significantly: it is now growing at 8%-9%yoy and as far as consumption is concerned is above potential. It is supported by a less restrictive fiscal stance than previously, together with sharply lower food prices and delayed increases to utility tariffs. We think headline inflation troughed in February at 3.7% but it should remain below 4.5% until May, before rising once more. However, given the current pace of growth, we expect core inflation pressures to continue to increase.

Monetary Policy Forecast: The CBR, like a number of other central banks, now appears to be in 'wait-and-see' mode, and rates are likely to remain on hold until 2Q2012. However, thereafter we see rates rising by 50bp in 2012. Meeting the 5%-6% inflation target for December 2012 will, in our view, depend on the appreciation of the Ruble in 2H.

Fiscal Policy Outlook: Rising oil prices have helped to lift the federal budget into surplus in 2011 and 2012. Fiscal policy has been tightened since mid-2010 but we expect it to be broadly growth-neutral in 2012.

Balance of Payments Situation: Based on our Commodity Strategists' positive view on oil prices, we expect the current account to accumulate a surplus of 4.6% of GDP in 2012.

Things to Watch: Following the March 4 elections, we await announcement of the new government's policy agenda. We think the market may be positively surprised. We will be watching closely to see whether the CBR remains committed to controlling inflation through interest rates while allowing a greater degree of flexibility on the exchange rate, or if it will inject liquidity to subsidise banks but undermine the currency.

0

5

10

15

20

25

30

35

40

95 97 99 01 03 05 07 09 11 13

$/RUB

Spot

GSDEER

Clemens Grafe

-5%

0%

5%

10%

15%

20%

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

% GDP4-qtr ma Russia: BBoP vs Current Account

CA

BBoP

14


March 2012

South African Rand FX Forecasts: We maintain our 3-, 6- and 12-month forecasts for $/ZAR at 7.40, 7.35 and 7.70. This implies €/ZAR at 9.84, 10.14 and 11.17 in 3, 6 and 12 months respectively. The current $/ZAR GSDEER is 6.35 and €/ZAR GSDEER is 7.61.

Motivation for Our FX View: With a better global growth environment and the stabilising effect of ECB LTRO operations, we see near-term upside for the ZAR (around 4%TWI appreciation over the next 3 months). However, the domestic growth outlook remains uncertain and inflation differentials have been rising. A widening current account deficit is also likely to exert depreciation pressures on the ZAR. Accordingly, we expect a trade-weighted depreciation over a 6- to12-month horizon (taking the TWI to around 5% weaker than current levels).

Monetary Policy and FX Framework: The South African Reserve Bank is operationally independent and sets its policy rate to keep CPI inflation within the official 3%-6%yoy target and, secondarily, to support growth and promote financial stability. The key policy rate is the 2-week repo rate.

Growth/Inflation Outlook: Softer global growth appears to been weighed on South African exports. However, stronger domestic demand probably more than offset this weakness, as growth reaccelerated to 3.2% ann in 4Q2011 (from 1.7% in Q3). Over 2012 we see growth remaining below trend, at 2.7%. Sustained cost-push pressures and base effects continue to drive headline inflation for now. However, over 2012 we expect core inflation pressures to gradually rise and start driving inflation more visibly. The net outcome is that we see headline inflation remaining above target until 2H2013.

Monetary Policy Forecast: Despite a recent uptick in growth, the outlook for 2012 remains uncertain, with significant domestic (lower wage settlements and/or industrial action) and global (renewed slowdown) risk factors. Inflation also looks set to remain high for some time. We expect the SARB to keep rates on hold through most of 2012, but rising core inflation and inflation expectations should ultimately prompt a 50bp rate hike in 4Q2012. That said, slower recovery (due to either external or domestic events) and/or a general acceptance of lower wage settlements would pose a risk that rates remain on hold for longer.

Fiscal Policy Outlook: Thanks to stronger than expected revenue performance (as well as some under-spending), the budget deficit for the current fiscal year looks set to come in at 4.8% of GDP, much less than the initially planned 5.5%. Although fiscal policy will remain accommodative for some time to come, the 2012 Budget reiterated a commitment to ongoing fiscal consolidation, at almost the same pace as previously outlined, taking the deficit to 3% by FY2014/15. Given the relative outperformance of revenues recently and risks to growth in 2012, we see a similar, but slightly slower, pace of consolidation.

Balance of Payments Situation: The current account deficit widened to 3.8% of GDP in 3Q2011. Softening external demand is likely to put pressure on the trade balance in the short run, while greater domestic absorption poses additional downside risks later in 2012H2. We see the CA deficit widening to around 4.5% of GDP by end-2012.

0

2

4

6

8

10

12

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

$/ZAR

Spot

GSDEER

-3%

-2%

-1%

0%

1%

2%

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

% GDP4-qtr ma

South Africa: BBoP vs Current Account

CA

BBoP

Michael Hinds

15


March 2012

Swedish Krona

4

5

6

7

8

9

10

11

12

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

EUR/SEK

Spot

GSDEER

-10%

-5%

0%

5%

10%

15%

20%

25%

90 92 94 96 98 00 02 04 06 08 10 12

% GDP4-qtr ma

Sweden: BBoP vs Current Account

CA BBoP

FX Forecasts: We are revising our EUR/SEK forecasts to 8.80, 8.70 and 8.60 from 9.00, 8.90 and 8.80 in 3, 6 and 12 months, respectively. This equates to a USD/SEK rate of 6.62, 6.30 and 5.93. Current GSDEER for EUR/SEK is 8.12.

Motivation for Our FX View: The Swedish Krona has traded in a broad range around our 3-month forecast since early January, after EUR/SEK moved lower as the ECB effectively eased policy more than the Riksbank. That said, the cross is notably stronger than the 2-yr swap rate differential would suggest. Given that the Swedish data isn't that strong, we are not convinced EUR/SEK can move sharply lower from current levels - rather, the cross is likely to trade in a new range of 8.80-9.00 in the near term before strengthening more sustainably on a 12-month horizon.

Monetary Policy and FX Framework: A flexible inflation targeter, responding to output fluctuations over and above what they imply for future inflation. The Riksbank's objective is to keep CPI inflation at around 2%. CPIF is the Riksbank's effective target. A flexible FX regime.

Growth/Inflation Outlook: The PMI rose above 51 in January, but eased to about 50 in February. The KI/NIER survey and the PMI now both point to flat or slightly positive growth in Q1. Q4 GDP came in very weak at -1.1%, in contrast to the surveys, which suggested about flat growth. However, we expect Q4 to be revised up in the same way as Q3 was revised down (from +1.6%qoq to +0.9%qoq) towards what the surveys would suggest (about +0.2%qoq in Q3). The Riksbank discounted the strong Q3 GDP number in December when cutting, and we think it will also partly discount the weak Q4 figure in April.

Monetary Policy Outlook: The Riksbank cut the policy rate by 25bp in December and in February, in line with our expectation, as demand for Swedish exports declined. Despite the weak Q4 GDP figure, we expect the Riksbank to remain on hold in the near term as surveys point to a rebound in momentum. We see hikes occurring from 2Q2013.

Fiscal Policy Outlook: The announced budget contained easing initiatives worth around SEK15bn (around 0.4% of GDP) as a consequence of a weaker growth outlook in 2012. Although this easing has reduced the structural balance, we continue to expect it to improve (now by around 5ppt of GDP). The Swedish fiscal position remains healthy, with the government budget close to balance and public debt at around 40% of GDP and declining.

Balance of Payments Situation: On a trend basis, Sweden's current account surplus remains relatively robust at 6.5% of GDP. The BBoP surplus stands at 5.0% of GDP on a trend basis, which is lower than the 20% surplus a couple of quarters ago. Other things equal, the BBoP surplus is positive for the SEK.

Things to Watch: Given that Sweden is a high beta to global growth, the momentum of our proprietary GLI is key to watch with regards to the performance of the external sector.

Fiona Lake and Lasse Holboell W. Nielsen

16


March 2012

Swiss Franc FX Forecasts: We have not changed our view and expect EUR/CHF to trade at 1.30, 1.30 and 1.30 in 3, 6 and 12 months. This equates to USD/CHF at 0.98, 0.94 and 0.90. EUR/CHF GSDEER is 1.40 and USD/CHF GSDEER is 1.17.

Motivation for Our FX View: The SNB announced in September 2011 that it would set a minimum rate for the CHF vs the EUR at 1.20 to prevent more CHF strength on the back of ongoing European sovereign tensions. In addition, the SNB's intention was to prevent deflation through ongoing declines in imported prices, and prevent a sharp decline in Switzerland's export performance. Although we think deflation risk will prompt the SNB to raise the minimum floor to 1.30, the resilience in growth is likely to keep the SNB in 'wait and see' mode for the very near term. Any concrete resolution of the European crisis would also push the CHF weaker. As one of our Top Trade recommendations, we recommend going long EUR/CHF for a target of 1.35 and a stop at 1.20.

Monetary Policy and FX Framework: The SNB targets inflation, with a ceiling on CPI set at less than 2% pa. Usually, the SNB uses 3-month libor as its policy instrument. However, in order to prevent deflation, the SNB has announced a minimum rate for EUR/CHF at 1.20 for the time being, and has said it is prepared to buy FX in unlimited quantities.

Growth/Inflation Outlook: The Swiss PMI increased to 49 in February but it remains to be seen how sustainable the uptick will prove. While Switzerland appears to have skirted a contraction in 4Q2011, we expect one quarter of contraction this year in Q1 at -0.5%qoq, 0.1%yoy growth for the entire year and 1.4% for 2013. We expect the weak growth to increase deflationary pressure, with CPI rising by just 0.4%yoy in 2012 and 0.7% in 2013.

Monetary Policy Forecast: We expect the SNB to raise the minimum level for the EUR/CHF to 1.30 to reflect the risks of deflation, and for that rate to remain in place until the risks of deflation have subsided. At that point, we would expect the Bank to switch back to using interest rates as its main policy instrument.

Fiscal Policy Outlook: Switzerland has a relatively low debt-to-GDP ratio and we forecast a small budget deficit of -0.3% of GDP this year.

Balance of Payments Situation: The Swiss current account surplus remains strong owing to a surplus on all components. As a result, the NBoP remains in surplus despite negative net FDI flows. Switzerland's portfolio flow data is complicated by its position as an international financial centre.

Things to Watch: The risk of further measures from the Swiss National Bank to prevent deflation has risen after several months of declining inflation.

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1.2

1.3

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1.7

1.8

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2.0

2.1

81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13

EUR/CHF

Spot

GSDEER

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

00 01 02 03 04 05 06 07 08 09 10 11 12

% GDP4-qtr ma

Switzerland: BBoP vs Current Account

CA BBoP

Fiona Lake & Constantin Burgi

17


March 2012

Turkish Lira FX Forecasts: We maintain our 3-, 6- and 12-month $/TRY forecast at 1.75, 1.80 and 1.85. This implies €/TRY at 2.33, 2.48 and 2.68 in 3, 6 and 12 months. The current $/TRY GSDEER is 2.29 and €/TRY GSDEER is 2.74.

Motivation for Our FX View: The large current account deficit continues to exert downward pressure on the TRY although a resumption of capital inflows has helped stabilise the currency since the start of the year. However, this is likely to have a stimulating impact on domestic demand and lead to a wider current account deficit, in the absence of strong countercyclical economic policy. As a result, we believe the TRY will remain under fundamental depreciation pressure and be susceptible to external shocks.

Monetary Policy and FX Framework: The CBRT formally adopted inflation targeting in 2006. The current medium-term targets are 5.0% for 2012 and 2013.

Growth/Inflation Outlook: Growth reached 8.9% in 2010 and continued to expand at an annualised rate of over 7% in 1Q2011, helped by still accommodative financial conditions. Since then, the economy has shown stronger signs of external rebalancing through a slowdown in investment demand and a weaker TRY. We expect growth to continue to slow over the coming quarters and forecast annual growth of 8.5% in 2011 and 2.5% in 2012. Inflation rose to 10.5% at end-2011, overshooting the CBRT's 5.5% target substantially. We expect inflation to remain elevated over 1H2012, before easing towards 6.5% by end-year, thanks to recent TRY appreciation.

Monetary Policy Forecast: The CBRT has been following an unorthodox policy of tightening domestic credit conditions while simultaneously driving the TRY weaker, in an effort to help rebalance the economy. However, in response to intensifying external risks and rapidly rising inflation, the Bank switched to a broader tightening policy (raising short-term money market rates, widening the corridor from the top and holding variable price repo auctions) in late 2011. Since January, rates on central bank funding (and O/N money market rates) have fallen and the corridor has been narrowed again. This should be more growth-supportive, but it presents risks to the ongoing rebalancing effort and policy may have to tighten again to achieve a narrowing in the CA deficit. We see O/N money market rates around 9.5% by mid-year, up from around 8% currently.

Fiscal Policy Outlook: Following a widening to 5.5% of GDP in 2009, the government introduced corrective measures in late 2010 and the deficit fell to slightly below 4%. Thanks to 'one-off' items and robust domestic activity, the deficit is likely to fall to around 1.5% in 2011, by our estimates. Over 2012 and 2013, fiscal policy should remain relatively well anchored, and we see the deficit in a 3.6%-3.8% range over the next two years.

Balance of Payments Situation: The current account deficit widened to 6.4% in 2010, peaked at 10.6% in 1Q2011 and is currently running close to 9.4% of GDP (3Q sa annualised). We expect further moderation in the remainder of 2011 and 1H2012, but the pace of rebalancing looks to have slowed markedly.

Things to Watch: External uncertainty continues to pose downside risks for Turkey.

0.0

0.5

1.0

1.5

2.0

2.5

95 97 99 01 03 05 07 09 11 13

$/TRY

Spot

GSDEER

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

% GDP4-qtr ma

Turkey: BBoP vs Current Account

CA

BBoP

Ahmet Akarli

18


March 2012

Americas Argentine Peso FX Forecasts: We revise our 3-, 6- and 12-month forecasts for $/ARS to 4.50, 4.80 and 5.20 from 4.45, 4.70 and 5.20. This implies €/ARS at 5.99, 6.62 and 7.54 in 3, 6 and 12 months respectively. The current $/ARS GSDEER is 3.06 and €/ARS GSDEER is 3.67. Our valuation model uses official inflation, which is thought to have significantly underestimated actual inflation since 2007. If higher non-government inflation estimates are used, undervaluation virtually disappears.

Motivation for Our FX View: The ARS continues to be used as the main nominal anchor to prevent further escalation of inflationary pressures but this strategy has generated significant real exchange rate appreciation. The ARS weakened 4.3% against the USD in 2010 while inflation rose an estimated 27%. In 2011, the $/ARS depreciated 7.9% (but inflation remained entrenched at 22%-23%). The loss of external competitiveness during 2010-11 will likely oblige the authorities to validate a faster ARS depreciation drift in 2012. Since October the authorities have adopted a number of FX market restrictions and financial measures to limit demand and increase the supply of USD in the local market. The authorities have also adopted a number of non-tariff trade barriers to limit imports.

Monetary Policy and FX Framework: The Central Bank conducts monetary policy through quantitative targets on M2. The 2012 monetary program is lax: M2 growth target is set at 26.4% (± 4.0%). The Central Bank intervenes heavily in the FX market. The Bank mops up the excess liquidity by issuing Lebacs/Nobacs.

Growth/Inflation Outlook: Real GDP grew a high 9.3% in 3Q2011 driven by a supportive external backdrop and overly stimulative fiscal and monetary policy. Real activity is decelerating at the margin given the constraints imposed by a significantly positive output gap, softening external demand (particularly from Brazil) and significant real currency appreciation. We expect real GDP to have expanded to around 9.0% on average in 2011 but to moderate to 4.0% in 2012. The government is thought to continue to under-report inflation: official figures put headline inflation at 9.5% in 2011 while non-government estimates put headline inflation at 20%-plus; i.e., more than double the official figure.

Monetary Policy Forecast: The Central Bank has a weak record of inflation control, and monetary policy remains subordinated to fiscal priorities. The Bank transferred US$16.2bn in reserves to the government in 2011-12 and is expected to transfer another US$5.7bn in 2012.

Fiscal Policy Outlook: Fiscal policy remains pro-cyclical and the fiscal surplus has been eroded at the margin. The government posted a 0.3% of GDP primary deficit in 2011 (consistent with a 2.2% of GDP overall fiscal balance). Cyclically adjusted the fiscal stance is lax.

Balance of Payments Situation: The trade surplus has been gradually eroded given the rise in imports (driven by currency appreciation and overly stimulated domestic demand). The current account posted a 0.8% of GDP surplus in 2010 (down from 3.6% of GDP in 2009) and is estimated to have ended 2011 at close to broad balance.

Things to Watch: The negotiation with the Paris Club and the measures to control the FX market and limit imports.

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91 93 95 97 99 01 03 05 07 09 11 13

$/ARS

Spot

GSDEER

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

% GDP4-qtr ma

Argentina: BBoP vs Current Account

CA

BBoP

Alberto M. Ramos

19


March 2012

Brazilian Real

FX Forecast: We are revising our 3-, 6- and 12-month forecasts for $/BRL to 1.70, 1.70 and 1.75 from 1.80, 1.85 and 1.90. This implies €/BRL at 2.26, 2.35 and 2.54 in 3, 6 and 12 months, respectively. The current $/BRL GSDEER is 2.58 and €/BRL GSDEER is 3.09.

Motivation for Our FX View: Improving global risk sentiment and a sharp acceleration in capital inflows are likely to continue to support the carry-rich BRL despite increased FX market activism by the authorities. The strong BRL appreciation pressure prompted the authorities to escalate the level of FX market intervention in February (through spot market USD purchases and the auction of Dollar reverse swaps). Furthermore, the authorities increased the taxation of certain types of capital inflows, and cautioned that capital controls could be broadened (and existing controls made more restrictive) if the pressure on the BRL to appreciate continues.

Monetary Policy and FX Framework: The 2012 IPCA inflation target was set at a generous 4.5% ± 2.0%. The MPC conducts monetary policy chiefly by setting the SELIC policy rate. The managed floating FX regime has been marked by large, frequent and discretionary interventions in the spot and derivatives FX markets.

Growth/Inflation Outlook: After the flat 3Q2011 (qoq sa) print, we expect real GDP growth to have recovered to 0.8% in 4Q2011. We forecast that real GDP growth will accelerate to 3.5% in 2012 from an estimated 3.0% in 2011. We expect IPCA inflation (yoy) to moderate slightly in 2012, to 5.4% from 6.5% in 2011, but to remain visibly above the 4.5% inflation target midpoint. Inflation expectations remain misaligned from the inflation target all the way to 2013. Services inflation remain high and outside the 6.5% upper limit of the inflation target band. The labour market picture remains tight.

Monetary Policy Forecast: The Central Bank has been easing monetary policy since August 2011 and seems inclined to deepen the easing cycle in the near term. We expect the MPC to deliver three more 50bp rate cuts, driving the Selic policy rate to 9.0% by June 2012.

Fiscal Policy Situation: Fiscal policy remains loose, which reduces the degrees of freedom available for the Central Bank to set monetary policy at a less restrictive level. The government met its primary fiscal surplus of 3.10% of GDP for 2011, and should meet it again in 2012.

Balance of Payments Situation: The current account deficit has been relatively stable at slightly over 2% of GDP since 2010. However, over the past few years the capital account has posted large inflows driven by solid FDI, portfolio and debt creating flows. In order to prevent additional pressure on the BRL the Central Bank increased the stock of international reserves to US$356bn at the end of February 2012, from US$181bn at end-2008.

Things to Watch: The authorities' degree of FX market activism in response to accelerating capital inflows and BRL overvaluation.

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92 94 96 98 00 02 04 06 08 10 12

$/BRL

Spot

GSDEER

-6%

-4%

-2%

0%

2%

4%

6%

8%

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

% GDP4-qtr ma Brazil: BBoP vs Current Account

CA

BBoP

Alberto M Ramos

20


March 2012

Canadian Dollar FX Forecasts: We maintain our $/CAD forecast at 0.99, 0.97 and 0.95 on a 3-, 6- and 12-month horizon. This implies EUR/CAD at 1.32, 1.34 and 1.38 in 3, 6 and 12 months. The current GSDEER for $/CAD is 1.15 and EUR/CAD GSDEER is 1.37.

Motivation for Our FX View: We expect Canada to outperform the US modestly in relative growth terms, buoyed by our constructive view on commodities, and this should be positive for the CAD. We also continue to expect broad USD weakness due to persistently wide twin deficits. This is in contrast to Canada, which, despite a negative current account, has a positive BBoP position. The Dollar will also likely continue to be weighed on by the Fed's monetary stance relative to elsewhere, as we expect another round of asset purchases beyond 'Operation Twist' in 1H2012.

Monetary Policy and FX Framework: The Bank of Canada (BoC) operates an inflation targeting regime (2% within a 1%-3% range), with a generally flexible stance on the currency. In the past, the BoC has only commented on FX during periods of disruptive FX price action in terms of levels and/or the speed of a move.

Growth/Inflation Outlook: Q4 GDP fell to 1.8%qoq ann after strong growth in Q3. This brings overall growth for 2011 to 2.5%. We expect 2.2%yoy growth in 2012 and 2.5% in 2013, above consensus. On inflation, we expect some slight relief in the months to come due to base effects, and forecast 2.1% for 2012 and 2.0% for 2013.

Monetary Policy Forecast: The BoC remained on hold in March and took a neutral stance on policy changes. The BoC raised its growth forecasts but still expects a deceleration due to a weaker external outlook through the financial, confidence and trade channels. We forecast no change in the policy rate from 1.00% until 50bp of hikes in 4Q2013.

Fiscal Policy Outlook: In the 2011 budget announcement, the deficit for fiscal year 2010-2011 was lowered by about 10% to C$36.2bn. The announced budget for 2011-2012 foresees a deficit of C$32.3bn, which should be reduced gradually in the coming years. Temporary elements of the stimulus package (Canada's Economic Action Plan) conclude in the current fiscal year and plans call for restrained spending growth over the next few years.

Balance of Payments Situation: The current account balance remains in deficit, although this has been fully offset by strong portfolio inflows, leaving the Broad Balance of Payments (BBoP) picture in Canada positive at present. We expect the current account deficit to narrow to 1.9% of GDP for 2012 and 1.9% for 2013.

Things to Watch: Cyclical domestic growth momentum continues to be an important factor, in addition to the high level of exposure to the US business cycle. We are also watching the main drivers of the CAD, including risk sentiment and the oil outlook.

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81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13

US Dollar/Canadian Dollar

Spot

GSDEER

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

90 92 94 96 98 00 02 04 06 08 10 12

% GDP4-qtr ma

Canada: BBoP vs Current Account

CA

BBoP

Constantin Burgi

21


March 2012

Chilean Peso FX Forecasts: We are maintaining our 3-, 6- and 12-month forecasts for $/CLP at 480, 475 and 465. This implies €/CLP at 638, 656 and 674 in 3, 6 and 12 months respectively. The current $/CLP GSDEER is 416 and €/CLP GSDEER is 498.

Motivation for Our FX View: The $/CLP has strengthened approximately 7% since end-December 2011, slightly underperforming other LatAm currencies. Firming global sentiment and the 20% increase in copper prices since mid-December have been key drivers of CLP strength. Solid macro fundamentals (including still solid domestic demand dynamics) should continue to support the CLP. Additional currency appreciation is likely to trigger demand for Central Bank intervention. We do not expect the Central Bank to intervene formally in the FX market until the CLP/USD tests the 450-465 level.

Monetary Policy and FX Framework: The Central Bank targets inflation (3.0%±1.0%) under a free-floating FX regime. FX market intervention occurs seldom and only under exceptional circumstances. Disciplined rules-based fiscal execution provides extra degrees of freedom to calibrate monetary policy.

Growth/Inflation Outlook: Real GDP growth moderated to 4.8%yoy in 3Q2011 from 6.6% in 2Q2011. In sequential seasonally adjusted terms, real GDP growth slowed in 3Q2011 to a below-trend 0.65%qoq sa, from 1.30% in 2Q2011. We estimate that real GDP grew a solid 6.3% in 2011 and expect it to downshift to 4.2% in 2012. Inflation pressures intensified in 4Q2011 driven by food supply shocks and some pass-through from a weaker CLP. Core inflation and inflation expectations remain well anchored around the inflation target. The output gap remains closed and the economy is operating at around full employment.

Monetary Policy Forecast: The Central Bank surprised the market consensus with a 25bp rate cut at the January MPC meeting, taking the policy rate to 5.00%, but then paused in February. In our assessment, the Central Bank is still ahead of the curve and the rate cut in January signalled a predisposition to act by adding monetary support to the economy in the event economic activity continues to slow. We could still see additional rate cuts in 1H2012, but if the global data and sentiment continue to improve and oil prices remain well bid, the Central Bank will likely feel comfortable about extending the pause while maintaining an implicit easing bias.

Fiscal Policy Outlook: Fiscal execution remains counter-cyclical. The central government posted a 1.4% of GDP fiscal surplus in 2011, up from a 0.4% of GDP deficit in 2010. The authorities are ready to add fiscal stimulus in 2012 if the economy continues to decelerate.

Balance of Payments Situation: The trade balance posted a solid US$15.9bn surplus in 2010 (7.8% of GDP) and the current account closed the year with a 1.9% of GDP surplus. The trade surplus eroded to a still solid US$10.6bn in 2011 (4.5% of projected 2011 GDP), pushing the current account into an estimated 1.8% of GDP deficit.

Things to Watch: The resilience of domestic demand given the challenging external environment and the monetary policy stance.

0

100

200

300

400

500

600

700

800

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

$/CLP

Spot

GSDEER

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

% GDP4-qtr ma Chile: BBoP vs Current Account

CA

BBoP

Alberto M. Ramos

22


March 2012

Colombian Peso FX Forecasts: We are maintaining our 3-, 6- and 12-month forecasts for $/COP at 1,800, 1,800 and 1,750. This implies €/COP at 2,394, 2,484 and 2,538 in 3, 6 and 12 months. The current $/COP GSDEER is 1,948 and €/COP GSDEER is 2,334.

Motivation for Our FX View: Solid domestic demand growth, robust FDI flows and a hawkish Central Bank support the COP outlook. Given the recent significant, rapid COP appreciation (approximately 9% since end-December), in January the Bank resumed its intervention in the FX market, and is to buy US$20mn/day at least until August 4. In addition, the Bank suspended the rules-based mechanism adopted in October involving the sale of US$200mn of dollar put/call options whenever the $/COP spot rate is ± 4.0% stronger/weaker than the 20-day moving average.

Monetary Policy and FX Framework: The Central Bank targets inflation (3.0%±1.0%) under a managed-float FX regime but has in the past intervened in the spot FX market to prevent excessive volatility.

Growth/Inflation Outlook: Real GDP grew 7.7%yoy in 3Q2011 (+1.7%qoq non-annualised, seasonally adjusted). Gross investment grew 18.7%yoy and total consumption firmed to 6.4%yoy; private consumption accelerated to 7.3%yoy. The external sector's contribution to growth was negative as exports grew 10.5%yoy but imports grew an even faster 18.8%yoy. We estimate that real GDP grew 5.7% in 2011, with the growth dynamics supported by buoyant domestic consumption and investment. Core (non-food) inflation remains well anchored to the 3.0% inflation target.

Monetary Policy Forecast: The MPC hiked the policy rate by 25bp to 5.25% at the February MPC meeting (matching the January move). The Bank would like to see domestic demand growth moderate in order to prevent the creation of demand-pull pressures on inflation. It is interpreting its inflation targeting mandate broadly rather than narrowly, inasmuch as it remains in tightening mode with a view to preventing the emergence of financial imbalances. That is, the MPC is taking a holistic view of monetary policy management: rather than being narrowly focused on meeting the inflation target, the MPC appears even more concerned with the potential formation of asset price bubbles (e.g., real estate) and/or excessive consumer leverage that could render households vulnerable to real and/or financial shocks. This implies that the Central Bank may decide to complement any potential additional rate hikes with macro-prudential measures (aimed at discouraging consumer borrowing and lending and/or discouraging domestic lending anchored in foreign funding).

Fiscal Policy Outlook: The central government used the better than expected revenue performance in 2011 to over-comply with the fiscal deficit targets.

Balance of Payments Situation: The current account deficit widened to US$8.9bn in 2010 (3.1% of GDP) from US$5.0bn in 2009 (2.1% of GDP). FDI flows reached a solid US$15bn in 2011. We expect the current account deficit to settle in the 2%-3% of GDP handle in 2011 and 2012, which should be more than fully financed by FDI inflows exceeding US$10bn.

Things to Watch: The real business cycle momentum and the Central Bank's stance.

0

500

1000

1500

2000

2500

3000

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

$/COP

Spot

GSDEER

-6%

-4%

-2%

0%

2%

4%

6%

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

% GDP4-qtr ma

Colombia: BBoP vs Current Account

CA BBoP

Alberto M. Ramos

23


March 2012

Mexican Peso FX Forecast: We are maintaining our 3-, 6- and 12-month forecasts for $/MXN at 12.55, 12.50 and 12.00, respectively. This implies €/MXN at 16.69, 17.25 and 17.40 in 3, 6 and 12 months respectively. The current $/MXN GSDEER is 12.69 and €/MXN GSDEER is 15.20.

Motivation for Our FX View: The MXN has been one of the best-performing LatAm currencies year to date; it has strengthened approximately 9% against the USD since end-December on the back of improving global sentiment, strong US data and a favourable technical position. The economy's solid fundamentals, strong macro policy and a non-activist central bank should anchor the currency and lead it to partially mean-revert from its 2H2011 distressed levels. However, the MXN remains vulnerable to a deterioration in global market sentiment. In November the Central Bank suspended the monthly auction of US$600mn dollar put options and reinstated the rules-based mechanism that calls for the auction of US$400mn cash whenever the MXN/USD is 2% or more weaker than the previous day's fixing.

Monetary Policy and FX Framework: The Central Bank targets inflation (3.0%±1.0%) by calibrating the TdF policy rate level under a managed-float FX regime. Banxico may intervene in the FX market to dampen volatility and/or avoid dislocations under thin market liquidity conditions.

Growth/Inflation Outlook: Real GDP growth moderated to 3.7%yoy in 4Q2011 from 4.5%yoy in 3Q2011. Real GDP expanded a moderate 3.9% in 2011 (down from 5.5% in 2010) and is likely to downshift further in 2012. The output gap remains negative, with economic slack still visible in the non-tradable sectors (e.g., there is significant slack in the labour market). The inflation outlook remains favourable although headline inflation has come under pressure since late in 2011 due to a local food-supply shock and some pass-through from a weaker MXN. The food price shock started to mean-revert in February. We expect core inflation to hover slightly above the 3.0% inflation target midpoint throughout 2012.

Monetary Policy Forecast: The policy rate has been unchanged at a stimulative 4.50% since July 2009. Given evidence that the economy continues to expand at a moderate around trend pace and that core goods inflation is gradually starting to show the impact (albeit moderate) of the pass-through from a weak MXN during 2H2011, we expect the Central Bank to leave the policy rate unchanged at 4.50% in the near term, and likely for the foreseeable future - unless compelling evidence emerges showing damage to the real business cycle.

Fiscal Policy Situation: The fiscal/public-debt picture is solid. The central government posted a 2.5% of estimated GDP deficit in 2011 (down from 2.8% of GDP in 2010).

Balance of Payments Situation: The current account posted a mild 0.8% of GDP deficit in 2011 (-US$8.8bn) up from a small 0.3% of GDP deficit in 2010. The current account deficit was more than covered by US$19.4bn in FDI inflows. The capital account posted a large surplus in 2011 (US$52.4bn excluding errors and omissions) anchored in solid FDI, portfolio and debt creating inflows.

Things to Watch: Outlook for US manufacturing production and the resilience of domestic demand.

0

2

4

6

8

10

12

14

16

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

$/MXN

Spot

GSDEER

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

91 93 95 97 99 01 03 05 07 09 11

% GDP4-qtr ma Mexico: NBoP vs Current Account

CA

NBoP

Alberto M Ramos

24


March 2012

Peruvian New Sol FX Forecasts: We are maintaining our 3-, 6- and 12-month forecasts for $/PEN at 2.69, 2.70 and 2.67. This implies €/PEN at 3.58, 3.73 and 3.87 in 3, 6 and 12 months, respectively. The current $/PEN GSDEER is 3.11 and €/PEN GSDEER is 3.72.

Motivation for Our FX View: The PEN has been under appreciation pressure since late 2011 mainly due to a process of portfolio recomposition by local agents as they unwind USD positions acquired at the peak of the electoral cycle in 2011, and stronger capital inflows. This has prompted the Central Bank to purchase US$3.5bn in FX reserves year-to-date in order to contain appreciation pressures. In our view, appreciation pressures are likely to moderate over the next six months as economic growth decelerates; however, appreciation pressures could strengthen if economic activity continues to surprise on the upside. Notwithstanding this, we expect low realised volatility in the $/PEN cross because the Central Bank's policy is to intervene discretionally in the FX market to avoid sharp price action.

Monetary Policy and FX Framework: The Central Bank pursues an inflation targeting regime: the target is a challenging 2%±1%. The Bank holds monthly monetary policy meetings and pursues a managed/floating FX regime.

Growth/Inflation Outlook: We revised our real GDP growth forecasts for 2012 to 5.5%yoy from 4.9% due to larger statistical carry-over from growth in 2011. Headline inflation at 4.16%yoy in February is outside the Central Bank's target band (2% ± 1%). However, we expect inflation to gradually come back within target as the supply-side shocks that pushed up inflation in 2011 recede and demand pressures remain subdued.

Monetary Policy Forecast: We no longer expect the Central Bank to cut rates in 2012. Currently at 4.25%, the policy rate is at broadly neutral levels. This gives the Bank space to move the policy rate in either direction in line with changes to the inflation outlook. The economy could still require monetary stimulus in 2012, but only if the global economic outlook worsens considerably. There are also upside risks for rates, in the event growth is stronger than we forecast and the inflation outlook deteriorates, requiring the BCRP to hike. Even so, we think the balance of risks for monetary policy is neutral, once we consider the domestic and external risks to the macro outlook for Peru.

Fiscal Policy Outlook: The government has already embarked on a fiscal stimulus package amounting to approximately 1.2% of GDP, most of which would be disbursed in 2012. We expect the fiscal surplus to shrink to zero in 2012 from a surplus of 1.8% of GDP in 2011.

Balance of Payments Situation: We expect the current account deficit to shrink to US$2bn (1% of GDP) in 2012 from US$2.3bn (1.3% of GDP) in 2011 as lower than expected profit repatriation in the mining sector offsets the projected moderate weakening of the trade surplus. In terms of the financial account, we expect capital inflows to moderate to US$7.8bn, leading to a solid US$5.8bn balance of payments surplus.

Things to Watch: Resolution of ongoing mining disputes.

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

91 93 95 97 99 01 03 05 07 09 11 13

$/PEN

Spot

GSDEER

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

90 92 94 96 98 00 02 04 06 08 10 12

% GDP4-qtr ma Peru: Current Account

CA

Eduardo A Cavallo

25


March 2012

FX Forecasts: We are maintaining our 3-, 6- and 12-month forecasts for $/VEF at a flat 4.3. This implies €/VEF at 5.72, 5.93 and 6.24 in 3, 6 and 12 months respectively. The current $/VEF GSDEER is 4.19 and €/VEF GSDEER is 5.02. The preferential of the two FX cash-rates operated by the Currency Control Board (CADIVI) was devalued in January, 2010 from 2.6 to 4.3 to the Dollar. The non-preferential rate remained unchanged at 4.3. This unified the two CADIVI rates. We estimate that the 39.5% devaluation of the strongest of the three official rates was equivalent to a moderate 13%-16% average devaluation of the VEF/USD.

Motivation for Our FX View: We do not expect a devaluation of the CADIVI rate ahead of the October presidential and December gubernatorial elections but would not rule out an adjustment to the upper limit of the SITME band. A sizeable devaluation early in 2013 seems highly likely: consumer prices have risen 63% since the January 2010 devaluation. In June 2010 the Central Bank began operating a new FX market (SITME, involving the sale of Dollar-denominated government bonds that can be sold abroad for USD). Through the SITME, the Central Bank sets an implicit VEF trading band (between 4.3 and 5.3 to the Dollar).

Monetary Policy and FX Framework: Monetary policy remains heavily subordinated to fiscal needs and the autonomy of the Central Bank has been compromised in recent years. The Bank sets a floor/ceiling on bank deposit/loan rates and directs about half of total credit in the economy.

Growth/Inflation Outlook: Headline inflation reached a high 29.0% in 2011 and we expect it to remain above 20% in 2012. Headline and core inflation have been running above 20% since 2007. The Caracas CPI has printed above 1% per month for 54 consecutive months and the core measure averaged 33.1%yoy between January 2008 and December 2011. This attests to how deeply ingrained inflation has become through inertia and policy accommodation, which increases the growth-inflation sacrifice-ratio (required output loss to disinflate the economy). Real GDP grew 4.9%yoy in 4Q2011 and 4.2%yoy in 2011. We expect real GDP to grow 4.0% in 2012.

Monetary Policy Forecast: Domestic financial conditions have been lax over the past few years (with highly negative real rates), which undermines the effectiveness of the fixed exchange rate as the economy's nominal anchor.

Fiscal Policy Outlook: Fiscal execution remains opaque. A significant amount of fiscal spending is taking place through the balance sheet of state-owned banks and PdVSA. The overall fiscal stance has been lax for many years.

Balance of Payments Situation: Higher oil prices generated a large 15.3% of GDP trade surplus, which led to another sizeable current account surplus in 2011 (9.0% of GDP). Sizeable private-sector capital flight is likely to persist, given the country's deteriorating macro performance, legal/regulatory uncertainty and weak enforcement of the sanctity of contracts.

Things to Watch: The health of President Chavez following surgery in February, fiscal spending and the political dynamics ahead of the October 2012 presidential elections.

Venezuelan Bolivar

0.0

1.0

2.0

3.0

4.0

5.0

94 96 98 00 02 04 06 08 10 12

$/VEF

Spot

GSDEER

-10%

-5%

0%

5%

10%

15%

20%

25%

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

% of GDP Venezuela: BBoP vs Current Account

CA

BBoP

Alberto M. Ramos

26


March 2012

Asia Australian Dollar

FX Forecasts: Our 3-, 6- and 12-month forecasts for A$/US$ remain unchanged at 1.08, 1.08 and 1.08. This implies €/AUD at 1.23, 1.28 and 1.34 in 3, 6 and 12 months respectively. The current A$/US$ GSDEER is 0.87 and €/A$ GSDEER is 1.37.

Motivation for Our FX View: A fall in risk appetite, a weaker 4Q2011 Australian GDP print relative to consensus expectations, comments from the RBA that the A$ may be overvalued and a downgrade in the official growth target in China have prompted a pullback in the A$ in recent days after a period of relative stability in recent weeks. Further ahead, the declining terms of trade, rising import bill and forecast deterioration in the trade balance point to a modest weakening in TWI terms. However, against the US$, these influences should be broadly offset by persistently high AUD-US interest differentials and a weakening in US BBoP flows.

Monetary Policy and FX Framework: Inflation targeting: The RBA aims to keep CPI inflation between 2% and 3% on average over the cycle. Operationally, this is implemented by attempting to keep underlying inflation within this target band, but it allows sufficient flexibility for policy to take account of short-run developments in employment and economic growth. The FX regime is free-float.

Growth/Inflation Outlook: We expect growth to accelerate from 2.0% in 2011 to 2.5% in 2012. Looking past the recovery in coal exports following flood disruptions in early 2011, the non-mining sectors of the economy contracted in 2H2011 and remain cyclically challenged. We expect a deteriorating unemployment rate to help to contain underlying inflation within the RBA's target band through 2012. We expect a more meaningful recovery in activity in 2013, with growth of 3.7%.

Monetary Policy Forecast: With underlying inflation contained, and in an environment of falling house prices, a strong A$, contractionary fiscal policy and an unemployment rate likely to exceed 5.5% in coming months, the risk that a policy setting marginally below neutral leads to a meaningful break-out in inflation appears minor relative to the risk that growth slows meaningfully. We expect a further 50bp in easing, with 25bp reductions in March and June, taking the cash rate to 3.75%.

Fiscal Policy Outlook: Even allowing for the recent slippage in revenue estimates, Australia's fiscal position is benign relative to comparable economies. The Federal Government is determined to consolidate the public finances promptly and achieve a surplus by 2012-13, seeing net debt to GDP peak at just 8.9% of GDP.

Balance of Payments Situation: A sharp rise in the terms of trade to a new all-time high in 2010-11 pushed Australia to its largest trade surplus (as a share of GDP) in 37 years. The trade balance has now come under pressure from an easing in commodity prices and rising capital investment goods imports.

Things to Watch: Further delay in the domestic easing cycle risks seeing the A$ gap meaningfully higher in the coming months. The currency will also continue to be sensitive to shifting sentiment on prominent global risks.

0.4

0.6

0.8

1.0

1.2

1.4

1.6

74 77 80 83 86 89 92 95 98 01 04 07 10 13

A$/$

Spot

GSDEER

-8%

-6%

-4%

-2%

0%

2%

4%

6%

90 92 94 96 98 00 02 04 06 08 10 12

% GDP4-qtr ma

Australia: BBoP vs Current Account

CA

BBoP

Economist: Tim Toohey [email protected] © 2012 Goldman Sachs Australia Pty Ltd. (ABN 21 006 797 897). All rights reserved.

Tim Toohey

27


March 2012

Chinese Yuan

3.4

4.4

5.4

6.4

7.4

8.4

9.4

90 92 94 96 98 00 02 04 06 08 10 12

$/CNY

Spot

GSDEER

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

% of GDP China: BBoP vs Current Account

CA

BBoP

BBoP = Current Account + Net FDI + Net Portfolio Investment

FX Forecasts: We are adjusting our 3-, 6- and 12-month USD/CNY forecasts to 6.27, 6.22 and 6.10 respectively, from 6.28, 6.24 and 6.12 previously. EUR/CNY: 8.34, 8.58 and 8.85 in 3, 6 and 12 months. GSDEER for the USD/CNY: 7.04.

Motivation for Our FX View: We still expect the CNY to appreciate modestly against the USD over a 12-month horizon. Specifically, we expect relatively slow CNY nominal bilateral appreciation against the USD in 1H2012 (2% annualised), as uncertainties over external demand are likely to remain high during that period. However, as sequential growth in external demand recovers throughout the year, China's sequential export growth should recover and net exports are likely to rise again, which should alleviate the concerns of the Chinese government and result in a moderately faster appreciation of 4% per annum in 2H2012.

Monetary Policy and FX Framework: The People's Bank of China (PBoC) is not independent from the central government and has multiple targets of maintaining price stability and high growth. The Monetary Policy Committee of the PBoC holds meetings on a quarterly basis. However, it is an advisory body that does not determine policy direction. Instead, actual policy decisions are made by the PBoC governors subject to supervision/approval by the State Council. The FX regime has been a managed float in July 2005 - August 2008 and again in June 2010.

Growth/Inflation Outlook: Real activity growth appears to be holding up fairly well judging by the recent PMI readings. Specifically, we expect January-February IP growth to be 12.6% yoy. This would imply an average sequential growth rate of 14.3%mom ann in January- February, just a touch below its trend level of 15%-16%. On the inflation front, the January CPI print was distorted on the upside by the Lunar New Year effects and the February reading is likely to be distorted on the downside. We expect February CPI inflation to fall to 3.3%yoy and the January-February average to be 3.9%yoy, down from 4.1%yoy in December.

Monetary Policy Forecast: We still see room for further monetary policy loosening in the near term and expect the PBoC to continue cutting the reserve requirement ratio (RRR), maintaining a relatively ample loan supply, and possibly interest rate cuts in the coming months.

Fiscal Policy Outlook: In the public announcement following the Central Economic Working Conference, the government mentioned structural tax cuts, which we believe would be a positive development in the light of the strong fiscal revenue growth we saw in 2011.

Balance of Payments Situation: The Chinese economy has become more balanced than it was in the pre-crisis period. In 2011, the current account surplus was 2.8% of GDP, down from 5.1% in 2010 and the almost double-digit level at the peak before the financial crisis.

Things to Watch: Export growth trajectory; liquidity supply.

Yu Song and Yin Zhang

28


March 2012

Hong Kong Dollar FX Forecasts: We are maintaining our 3-, 6- and 12-month forecasts for $/HKD at 7.80, 7.80 and 7.80. This implies €/HKD at 10.4, 10.8 and 11.3 in 3, 6 and 12 months respectively. The current $/HKD GSDEER is 6.18 and €/HKD GSDEER is 7.40.

Motivation for Our FX View: In our view, the political incentive to abandon (or modify) the HKD peg system is still low; in particular, the uncertainties surrounding the near-term global growth outlook may hold the authorities back from making changes to the current HKD peg system.

Monetary Policy and FX Framework: The HKMA pursues just one goal: maintaining the USD/HKD peg. The HKD exchange rate follows a currency board regime, with a fixed USD/HKD 'Convertibility Zone' of 7.75-7.85.

Growth/Inflation Outlook: GDP for 4Q2011 expanded by 3.0%yoy, after 4.3%yoy in 3Q2011. On a sequential basis, GDP growth increased 1.2% quarter-on-quarter, annualised (qoq ann), after 0.4%qoq ann in 3Q2011. Annual GDP growth averaged 5.0%yoy in 2011, down from 7.0%yoy in 2010. The government forecasts 2012 GDP growth in a range of 1%-3%. We currently forecast below-trend GDP growth of 3.6% in 2012 and a rise to 5.0%yoy in 2013. On the inflation front, the government forecasts 2012 headline CPI inflation at 3.5%. This compares to our forecast of 3.8%. Our CPI inflation forecast for 2013 stands at 4.4%.

Monetary Policy Forecast: We think the HKD-USD peg is likely to remain in place for some time, given the lack of a better alternative monetary policy regime for now. In our opinion, the costs of transitioning to a new regime would outweigh the benefits. In the meantime, we think that, before eventually moving to a HKD-CNY peg, Hong Kong will have little choice but to continue to import loose financial conditions from the US, with its interest rates still linked to the USD interest rate cycle, as long as the US Fed maintains its accommodative monetary policy stance.

Fiscal Policy Outlook: For FY2010/2011, the government budgeted a consolidated budget surplus of US$9.7bn, or 4.3% of GDP. For FY2011/2012, the budgeted surplus is US$1.9bn, or 0.8% of GDP. In our view, the overall fiscal stance is net expansionary, with targeted support for households to cope with rising inflationary pressures.

Balance of Payments Situation: We expect the current account surplus to be 3.6% of GDP in 2011, versus 6.6% of GDP in 2010. Given the fixed exchange rate system in Hong Kong, the BBoP has not been a determining factor for its monetary policy system, or for the HKD exchange rate specifically. As Hong Kong is an entrepot trade centre for the mainland and an offshore hub for investment in China, the relevance of the BBoP position for the currency relates primarily to portfolio capital flows.

Things to Watch: We continue to monitor for further developments in soft and hard infrastructures to enhance the integration with the mainland economy, including the expansion of CNY businesses.

4.30

5.30

6.30

7.30

8.30

9.30

10.30

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

$/HKD

Spot

GSDEER

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

00 01 02 03 04 05 06 07 08 09 10 11 12

% GDP4-qtr ma Hong Kong: BBoP vs Current Account

CA

BBoP

Shirla Sum

29


March 2012

Indian Rupee FX Forecasts: Our 3-, 6- and 12-month USD/INR forecasts remain unchanged at 53.0, 50.7 and 49.0 respectively. Our 3-, 6- and 12-month EUR/INR forecasts remain at 70.5, 70.0 and 71.1. Current GSDEER for USD/INR is 62.9.

Motivation for Our FX View: After reaching our 3-month target of 53, the INR rose sharply on the back of increased risk appetite and equity inflows at the start of 2012. The INR remained stable in February, then started to depreciate again, in part due to risk-off sentiment in markets, rising oil prices, delays in RBI policy rate cuts and uncertainties about the forthcoming budget. In the near term, we expect the INR to depreciate further due to high oil prices and the fact that the poor performance of The Congress Party in the State Elections will likely push back critical economic reforms. We do not see a sharper depreciation as we would expect intervention by the RBI if this scenario plays out. In the longer term, we expect a slight recovery of the INR as policy rate cuts lead to a pick-up in the investment cycle and an improvement in global demand conditions.

Monetary Policy and FX Framework: Following the operating procedure for monetary policy, the RBI targets the interest rate corridor, with the repo rate in the centre, the reverse repo rate 100bp below it as a floor, and the new Marginal Standing Facility (MSF) rate 100bp above as a ceiling. The exchange rate is also managed to avoid excess volatility.

Growth/Inflation Outlook: October-December real GDP growth came in at 6.1%yoy. We think GDP is likely to have troughed in the October-December quarter, although we continue to expect activity to remain weak in 1H2012, with a gradual recovery thereafter. December IP came in at 1.8%yoy, with the slowdown broad-based and due to continued weak investment and general activity levels.

Monetary Policy Forecast: The RBI cut the cash reserve ratio (CRR) for banks by 50bp to 5.5% on January 24 but kept the repo rate unchanged at 8.5%. For the meeting on March 15, the RBI may be tempted to keep rates on hold given the high oil prices and the fact that the Union Budget is due to be presented a day after the meeting. We expect a 50bp CRR cut between now and the policy meeting.

Fiscal Policy Outlook: We recently revised our estimates for the fiscal deficit for FY2012 to 6.0% of GDP (from 5.8% previously), largely due to a fall in tax revenues, and a large increase in fuel subsidies. We expect the budget for FY2013 to focus on fiscal consolidation and estimate fiscal deficit at 5.3%.

Balance of Payments Situation: India's current account deficit for 2QFY2012 increased to 3.7% of GDP from 3.4% of GDP in 1QFY2012. The deterioration in the current account balance was led by a rise in the trade deficit. We expect the current account deficit to remain high at 3.4% of GDP in FY2012, with upside risks due to higher crude oil prices.

Things to Watch: IP, WPI, Union Budget, RBI Monetary Policy.

7

17

27

37

47

57

67

77

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

$/INR

Spot

GSDEER

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

% GDP4-qtr ma

India: BBoP vs Current Account

CA

BBoP

Tushar Poddar, Prakriti Shukla and Vishal Vaibhaw

30


March 2012

Indonesian Rupiah

FX Forecasts: Our 3-, 6- and 12-month forecast for $/IDR is 8,900, 8,800 and 8,700 respectively. This implies €/ IDR at 11,837, 12,144 and 12,615 in 3, 6 and 12 months. The current $/IDR GSDEER is 10,429.

Motivation for Our FX View: We expect the strength in the underlying fundamentals to remain a positive catalyst for the IDR, especially against the backdrop of broad USD weakness that we continue to expect over the next 12 months. In the near term, however, doubts over the BI's dovishness (100bp in rate cuts) against a backdrop of rising inflationary pressures this year have led to some market jitters. There is a risk that this uncertainty leads to further weakness in domestic assets, including the IDR, in the near term. The BI can address this by reacting appropriately should higher inflationary pressures materialise, which would allow the IDR to resume an appreciation path.

Monetary Policy and FX Framework: Bank Indonesia operates in an Inflation Targeting Framework, which aims to improve effectiveness and governance in monetary policy, in order to achieve the ultimate goal of price stability in support of sustainable economic growth and public prosperity. The IDR operates as a managed float with the aim of preventing excessive exchange rate volatility.

Growth/Inflation Outlook: 4Q2011 real GDP growth came in at 6.5%yoy. Headline growth was boosted by rising investments and domestic consumption, offsetting weakening export growth. We maintain our GDP growth forecasts of 5.4% and 6.3% for 2012 and 2013. We expect an acceleration in headline CPI in the months ahead. Inflation has been on a steady decline over the past year, but headline CPI will likely climb in the months ahead as base effects go into reverse. There are also upside risks depending on the ongoing fuel subsidy deliberations. The government is currently mulling over options to adjust fuel subsidies, which could be implemented as soon as April.

Monetary Policy Forecast: Bank Indonesia (BI) announced a 25bp reduction in its policy rate to 5.75% in its February meeting. We were surprised by the decision to cut rates by 25bp at the last meeting (a 100bp cumulative cut so far), given that the balance of risks in our view were tilting towards inflation rather than growth. Our baseline view is that the BI will keep rates on hold at 5.75% this year. However, it could potentially reverse course and hike rates (depending on the fuel subsidy deliberations) against a backdrop of potentially stabilising growth and rising inflationary pressures.

Fiscal Policy Outlook: The government unveiled a draft FY2012 budget that aims to cut the deficit to 1.5% of GDP from 2.1% expected in FY2011. Overall debt levels are expected to remain low at 24% of GDP.

Balance of Payments Situation: The current account balance fell to -0.4% of GDP in 4Q2011 from 0.2% of GDP in 3Q. We expect the current account balance to remain in small surplus for 2012.

Things to Watch: Inflation trends, especially given the uncertainty on fuel subsidy adjustments.The Central Bank's potential measures for managing domestic liquidity, together with other macro-prudential measures. Longer-term infrastructure investment trends.

-6%

-4%

-2%

0%

2%

4%

6%

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

% GDP4-qtr ma

Indonesia: BBoP vs Current Account

CA

BBoP

Mark Tan

0

2000

4000

6000

8000

10000

12000

14000

81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13

US$/Indonesian Rupiah

Spot

GSDEER

31


March 2012

Korean Won

FX Forecasts: We are maintaining our 3-, 6- and 12-month forecasts at 1,150, 1,080 and 1,040. This incorporates our fundamentally positive view on the KRW and receding yet still substantial near-term concerns on the Euro area. This implies EUR/KRW at 1,530, 1,490 and 1,508 in 3, 6 and 12 months respectively. The current USD/KRW GSDEER is 1,357 and EUR/KRW GSDEER is 1,626.

Motivation for Our FX View: Our FX view reflects a reduction in the tail risks from the Euro area and a sharp fall in bond yields in Europe's periphery. However, given lingering event and recession risks in Europe, as well as the adverse seasonality of Korea's current account and risks of oil supply disruptions, we continue to see the near-term risk for the USDKRW as skewed to the upside.

Monetary Policy and FX Framework: Korea has a formal inflation-targeting regime that looks for annual headline inflation of 2%-4% over 2010-2012. The exchange rate policy is traditionally undertaken by the government. The exchange rate regime has changed from a free-floating to a floating regime, according to the IMF, as a result of smoothing interventions in 2010 amid ample global liquidity.

Growth/Inflation Outlook: Our real GDP growth forecast for 2012 is at 3.5%, with the improved external outlook largely offset by the inventory accumulation data that could weigh on production in early 2012. We expect inflation to soften gradually to the BoK's central target inflation rate of 3% by mid-2012 on the back of declines in food prices and slowing growth momentum in 1H2012. Supply disruptions for oil and a potential resultant surge in oil prices could be a significant risk, though.

Monetary Policy Forecast: We expect no rate cut in 2012, given the stronger-than-expected global growth momentum and signs of improvement in European financial conditions. Recent global macro indicators suggest that the growth momentum is stronger than we were forecasting both in the US and Europe, and that European financial conditions are not as tight as we thought.

Fiscal Policy Outlook: Fiscal policy has already tightened substantially over the past year and so far this year. The 2012 budget should envisage a further 0.9%-of-GDP decline in the budget deficit, with the aim of a balanced budget by 2013.

Balance of Payments Situation: We expect the current account surplus to decline marginally in 2012 but still record a surplus of around 2.0% of GDP in 2012. This, together with expected capital inflows, should help strengthen the KRW.

Things to Watch: Uncertainties in Europe could be renewed amid bond auctions or unexpected political turns. The upward trend in the oil price is another risk as it could cap growth and earnings momentum, while pushing up inflationary pressures. We expect the MPC to keep the policy rate on hold again at the next MPC meeting, possibly with a hawkish tone, highlighting inflationary pressure amid rising oil prices. March export data, due out on April 1, will be important not only for Korea but also for the global economy.

600

800

1000

1200

1400

1600

1800

81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13

US$/Korean Won

Spot

GSDEER

-6%

-4%

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4%

6%

8%

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91 93 95 97 99 01 03 05 07 09 11

% GDP4-qtr ma

Korea: BBoP vs Current Account

CA

BBoP

Goohoon Kwon and Sungsoo Chung

32


March 2012

Malaysian Ringgit

FX Forecasts: Our 3-, 6- and 12-month forecasts for $/MYR are 3.00, 2.98 and 2.96 respectively. This implies EUR/MYR at 3.99, 4.11 and 4.29 in 3, 6 and 12 months respectively. The current $/MYR GSDEER is 2.64.

Motivation for Our FX View: We continue to forecast Ringgit strength over the medium term, against the backdrop of broad USD weakness. There are fundamental appreciation pressures on the currency, given the economy's healthy broad balance of payments (BBoP) surplus. Structurally, a stronger exchange rate is also appropriate for what the government is hoping will be an extended period of increased capital expenditure, given the long-term economic objectives envisaged in its Economic Transformation Program.

Monetary Policy and FX Framework: Monetary policy is set by the Board of Directors of Bank Negara Malaysia (BNM). The policy instrument is the Overnight Policy Rate, which is 3.0% currently. The Ringgit has operated in a managed float framework since its USD peg was lifted in July 2005.

Growth/Inflation Outlook: Real GDP grew 5.2%yoy in 4Q2011, versus 5.8%yoy growth in 3Q2011. Total domestic demand grew by 7.5%yoy in 4Q2011 from 4.8%yoy in 3Q2011. Our expectations are for slowing growth driven mainly by slowing external demand while domestic demand provides a relative buffer. Our GDP growth forecast for 2012 is currently at 3.8%, down from 5.1% growth for 2011.Our forecast for CPI inflation is 2.8% for 2012, moderating from 3.2% in 2011. January CPI inflation came in at 2.7%yoy, moderating from December's print of 3.0% yoy.

Monetary Policy Forecast: Bank Negara Malaysia kept the Overnight Policy Rate unchanged at its January meeting, which was in line with our and consensus expectations. We expect Bank Negara Malaysia to keep rates on hold at 3.0% for this year. In our view, inflation is likely to have peaked. While there is room for monetary accommodation should external conditions deteriorate further, we think the BNM will stand pat at current levels given the improved outlook that we envisage for US and Europe.

Fiscal Policy Outlook: The government is targeting a fiscal deficit at 4.7% of GDP in 2012 from 5.4% in 2011. More needs to be delivered on fiscal consolidation if the government is to achieve its target of lowering the deficit to the 3% level by 2015.

Balance of Payments Situation: The current account maintained a healthy surplus of MYR22.0 bn in 4Q2011 from MYR26.6bn previously. Portfolio investments improved to MYR-2.7bn in 4Q2011 from MYR-23.4bn in 3Q2011, while net FDI fell further to MYR-7.90bn from MYR-7.7bn previously. We expect the broad balance of payments to remain in healthy surplus, currently around 12% of GDP on a rolling basis.

Things to Watch: The timing of general elections, which have to be called before mid-2013. Progress on the government and economic transformation programs. Progress on continued foreign exchange liberalisation and subsidy (especially fuel) reforms.

2.0

2.5

3.0

3.5

4.0

4.5

81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13

US$/Malaysian Ringgit

Spot

GSDEER

-5%

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00 01 02 03 04 05 06 07 08 09 10 11 12

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Malaysia: BBoP vs Current Account

CA

BBoP

Mark Tan

33


March 2012

New Zealand Dollar

FX Forecasts: We have retained our 3-, 6- and 12-month forecasts for NZD/$ at 0.83, 0.84 and 0.87. This implies €/NZD at 1.60, 1.64 and 1.67 in 3, 6 and 12 months respectively. The current NZD/$ GSDEER is 0.64 and €/NZD GSDEER is 1.88.

Motivation for our FX view: Over the past month, the NZD has traded broadly around our 3-month forecast and there has been little to alter our view of the NZD rising slowly over a 12-month horizon. Slightly better domestic data has seen the market effectively remove the possibility of interest rate cuts, and without a further escalation in Euro area concerns we see it as unlikely that the NZD will trade meaningfully lower in the near term. Despite a deteriorating current account outlook, the BBoP remains in surplus. Ongoing US Dollar weakness will likely continue to be a key driver of NZD appreciation.

Monetary Policy and FX Framework: The RBNZ is a flexible inflation targeter. The RBNZ Governor is sole decision maker on the Official Cash Rate (OCR), and contracted to achieve "future CPI inflation outcomes between 1 per cent and 3 per cent on average over the medium term." The FX regime is a free float.

Growth/Inflation outlook: While some data has pointed to stabilisation, we believe domestic economic momentum is currently soft. Part of this will reflect activity returning to more 'normal' rates after the Rugby World Cup. While we expect sequential economic momentum to recover gradually over 2012, the combination of tight financial conditions, slowing population growth, a peak in the terms of trade, the delayed earthquake rebuild and contractionary fiscal policy result in our below consensus growth view of 2.1% for 2012 as a whole. Headline inflation has fallen below 2%yoy and underlying inflation remains contained. Furthermore, inflation expectations are moderating. Supply constraints from earthquake reconstruction work will boost inflation although rebuild delays mean this impact is being pushed out.

Monetary Policy Forecast: We expect the RBNZ to gradually start to lift the OCR from 4Q2012, with 50bp of hikes over 2012 as a whole. If anything, we see the risk skewed to a modestly more delayed tightening cycle.

Fiscal Policy Outlook: The social and economic cost of the earthquakes, as well as a weak cyclical recovery, have resulted in a sharp deterioration in NZ's fiscal position, although debt levels remain relatively low. Nevertheless, the NZ government appears strongly committed to a path of fiscal consolidation, with surpluses forecast to return in FY2015. This will be a challenge to achieve, in our view.

Balance of Payments Situation: The annual current account balance sits at -4.3% of GDP. This is forecast to widen to -6.2% of GDP by the end of 2013 due to a peak in the terms of trade and weaker export demand. However, reinsurance flows from the earthquakes should insure NZ's BBoP remains in surplus for some time yet.

Things to Watch: With global tail risks moderating (although not completely negated), domestic economic momentum and the perceived timing of interest rate hikes will be important. Watch labour market indicators, as well as the housing market and consumer spending trends.

0.35

0.55

0.75

0.95

1.15

1.35

1.55

74 77 80 83 86 89 92 95 98 01 04 07 10 13

NZ$/$

Spot

GSDEER

Philip Borkin

-16%

-14%

-12%

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-8%

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New Zealand: BBoP vs Current Account

CA

BBoP

Economist: Philip Borkin [email protected] © 2012 Goldman Sachs New Zealand Limited. All rights reserved.

34


March 2012

FX Forecasts: We are maintaining our 3-, 6- and 12-month forecasts for $/PHP at 42.4, 42.1 and 41.7. This implies €/PHP at 56.4, 58.1 and 60.5 in 3, 6 and 12 months. The current $/PHP GSDEER is 55.08 and €/PHP GSDEER is 65.98.

Motivation for Our FX View: A number of factors remain supportive of Peso strength over the next 12 months, but in particular stable remittances and growing IT service exports. In addition to the above, a sizable current account surplus, partly due to strong remittances, is also likely to be supportive of the PHP. In the near term, however, increasing risks relating to the external environment would likely imply less appreciation.

Monetary Policy and FX Framework: The Bangko Sentral ng Pilipinas (BSP) has an inflation targeting framework (3%-5% in 2012) and aims to promote price stability to facilitate balanced and sustainable growth. The BSP uses the overnight reverse repo rate (lending rate) and repo rate (borrowing rate) as its key policy instruments. The PHP operates in a freely-floating exchange rate environment, where the BSP intervenes to manage excess volatility through open-market operations.

Growth/Inflation Outlook: Real GDP grew 3.7%yoy in 4Q2011, after 3.6%yoy in 3Q2011. On a quarter-on-quarter; seasonally-adjusted annualised basis, this implies a sequential expansion of 3.8%, after an increase of 3.0% previously. Annual 2011 GDP growth averaged 3.7%, compared with 7.6% in 2010 and the estimated trend growth of 5%. We currently forecast 2012 GDP growth at 3.8%. For 2013, we maintain our growth forecast of 5.0%. On the inflation front, we believe inflation has peaked and will continue to moderate going forward. Our forecast is for inflation to slow to 3.7% in 2012 from 4.8% in 2011.

Monetary Policy Forecast: We maintain our view that the BSP will keep the policy repo and reserve repo rate on hold at 6.00% and 4.00% respectively. In our view, the improved outlook for the US and especially for the European sovereign debt issue has lowered the urgency for further rate cuts. Upside risks to inflation have also increased given the sharp increase in oil prices recently.

Fiscal Policy Outlook: The overall fiscal stance of President Aquino's first budget will likely be a net contraction, after two years with an expansionary stance in 2008 and 2009. We expect the 2011 budget deficit to be further reduced to 2.8% of GDP, compared with the government's target of 3.2%. Historically, the government has been bold in introducing fiscal packages during growth downturns, and we would expect it to introduce some fiscal measures in 2012 as well, should the external environment deteriorate in line with our forecasts.

Balance of Payments Situation: Strong remittances and a growing service export sector are likely to support the current account. We expect the current account surplus to come in at 2.4% of GDP in 2011.

Things to Watch: The new President's commitment to lower the fiscal deficit and the pace of remittances. We continue to expect overseas remittances to grow at a solid pace and forecast growth of 8% this year (versus the government's forecast of 7%).

Philippine Peso

5

15

25

35

45

55

65

81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13

US$/Philippine Peso

Spot

GSDEER

-6%

-4%

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00 01 02 03 04 05 06 07 08 09 10 11 12

% GDP4-qtr ma

Philippines: BBoP vs Current Account

CA

BBoP

Shirla Sum

35


March 2012

Singapore Dollar FX Forecasts: Our 3-, 6- and 12-month forecasts for $/SGD forecasts are 1.24, 1.22 and 1.20 respectively. This implies €/SGD at 1.65, 1.68 and 1.74 in 3, 6 and 12 months. The current $/SGD GSDEER is 1.15.

Motivation for Our FX View: We continue to forecast SGD appreciation over the medium term on the back of broad USD weakness. At its last bi-annual meeting, the Central Bank announced that it would reduce the slope of its currency bands to that of a modest and gradual appreciation stance, with no change to the centre of the bands. We estimate that the Central Bank has shifted the slope from an appreciation of 3% to one of 2% per annum, with the width of the bands unchanged. We are expecting the MAS to keep this modest appreciation stance unchanged at the April meeting, which should underpin further appreciation bias for SGD.

Monetary Policy and FX Framework: The MAS conducts monetary policy by targeting an undisclosed appreciation path of the SGD NEER within a policy band, with the goal of maintaining stable inflation and growth. The MAS last reduced the slope of its currency bands to one of modest and gradual SGD NEER appreciation, with no change to the width or centre of the bands.

Growth/Inflation Outlook: The 4Q2011 GDP print showed growth moderating to 3.6%yoy from a revised 6.0%yoy in 3Q2011. On a quarter-on-quarter seasonally-adjusted annualised (qoq sa ann) basis, 4Q2011 GDP contracted 2.5% versus a revised +2.0% in 3Q2011. We expect GDP growth to slow to 2.5% in 2012, below the trend rate of 3%-5% (the government's forecast range was between 1% and 3%). The slowing stems mainly from the deterioration in external demand. January CPI inflation moderated to 4.8%yoy, from 5.5%yoy in December.

Monetary Policy Forecast: We are expecting the MAS to keep the SGD policy stance unchanged at its April meeting at the current setting of a "moderate and gradual appreciation". While uncertainty still abounds in the external environment, the degree of deterioration that we have seen so far in global growth is unlikely to cause the Singapore authorities sufficient concern to ease the policy slope to zero. At the same time, inflationary pressures remain elevated.

Fiscal Policy Outlook: The FY2012 budget projects a primary surplus of 0.8% of GDP. Fiscal policy in Singapore has been actively anti-cyclical over the years. We estimate the fiscal impulse (which measures how expansionary or contractionary the fiscal stance is compared with the previous years) for 2012 to be slightly more expansionary than in 2011, consistent with the backdrop of a slowing economy. The 2012 budget implies a fiscal impulse of 0.3% of GDP for 2012, versus -1.2% for 2011.

Balance of Payments Situation: The current account surplus is expected to come in at around 15% of GDP this year from around 18% previously, on the back of slowing exports.

Things to Watch: The government's continued efforts to restructure the economy by boosting domestic productivity and reducing reliance on foreign labour. This may have inflationary consequences over the medium term.

1.00

1.20

1.40

1.60

1.80

2.00

2.20

2.40

81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13

US$/Singapore Dollar

Spot

GSDEER

-25%

-15%

-5%

5%

15%

25%

35%

90 92 94 96 98 00 02 04 06 08 10 12

% GDP4-qtr ma Singapore: BBoP vs Current Account

CA

BBoP

Mark Tan

36


March 2012

Taiwan Dollar FX Forecasts: We are maintaining our 3-, 6- and 12-month forecast for $/TWD at 29.4, 29.0 and 28.8. This implies €/TWD at 39.1, 40.0 and 41.8 in 3, 6 and 12 months, respectively. The current $/TWD GSDEER is 25.36 and €/TWD GSDEER is 30.38.

Motivation for Our FX View: A strong balance of payments position should continue to support the TWD in the medium and long term, although increased risks relating to the external outlook and less imported price pressures would imply less appreciation in the near term.

Monetary Policy and FX Framework: The CBC manages inflation and growth expectations simultaneously; it adopts an intermediate monetary policy target for M2 growth (between 2%yoy and 6%yoy). The IMF defines the TWD exchange rate regime as a managed float, and we believe the weightings for the KRW, JPY and CNY are the highest in the trade-weighted basket of currencies that it monitors.

Growth/Inflation Outlook: The advance 4Q2011 GDP growth print came in at 1.9%yoy, compared with 3.4%yoy in 3Q2011. On a seasonally-adjusted quarter-on-quarter annualised (qoq ann) basis, this implies a sequential decline of 1.0%, after a contraction of 0.8% in 3Q2011. Domestic demand (more specifically gross investment) was the main area of weakness, with a negative 3.7ppt drag on headline yoy GDP growth. The external sector saw a bounce back in growth after the poor performance in 2Q2011 and 3Q2011, but remained weak. Annual 2011 GDP growth averaged 4%yoy, down from 10.7%yoy in 2010. The government lowered its 2012 annual GDP growth forecast to 3.9%yoy from 4.2%yoy previously. Our current GDP growth forecasts for 2012 and 2013 stand at 3.0% and 4.5%, respectively. On the inflation front, the government has raised its inflation forecast for 2012 slightly to 1.3%, from 1.1% previously.

Monetary Policy Forecast: We expect the Central Bank to keep the policy rate on hold. We believe the improved external outlook will likely translate into firmer exports and investment growth than previously expected; furthermore, stickier-than-expected inflation in the near term has reduced the room for rate cuts.

Fiscal Policy Outlook: We expect the budget deficit to continue to decrease, to 2.6% of GDP in 2011 and 2.4% of GDP in 2012, due to the government's fiscal consolidation efforts. The consolidated budget deficit reached NT$426.3bn (3.1% of GDP) in 2010, lower than the NT$432.7bn (3.5% of GDP) deficit in 2009.

Balance of Payments Situation: The broad balance of payments (BBoP) in 4Q2011 registered a larger deficit of US$8.6bn (7.3% of GDP) than the US$6.3bn deficit recorded in 3Q2011 (5.4% of GDP). The current account surplus remained strong at US$12.1bn (10.4% of GDP) in 4Q2011. In comparison, the 3Q2011 current account surplus was US$10.2bn (8.8% of GDP).

Things to Watch: We would continue to pay close attention to ongoing cross-straits developments, including the Individual Visitors' Scheme between China and Taiwan.

24

26

28

30

32

34

36

90 92 94 96 98 00 02 04 06 08 10 12

US$/Taiwan Dollar

Spot

GSDEER

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Taiwan: BBoP vs Current Account

CA

BBoP

Shirla Sum

37


March 2012

Thai Baht FX Forecasts: Our 3-, 6- and 12-month forecasts for $/THB are 30.75, 30.50 and 30.25 respectively. This implies €/THB at 40.90, 42.09 and 43.86 in 3, 6 and 12 months. The current $/THB GSDEER is 36.31.

Motivation for Our FX View: One of the main underlying drivers of the currency is the broad Dollar direction (we expect continued USD weakness) and as such our THB forecasts continue to reflect spot appreciation over the medium term, bearing in mind possible swings in the near term on risk aversion. In the short term, the impact of the post-flood reconstruction on inflation and the implications for monetary policy will also have to be monitored closely.

Monetary Policy and FX Framework: The Bank of Thailand (BoT) sets the direction of monetary policy with price stability as the overriding objective, and also refines the inflation targeting framework (core CPI at 0.5% to 3.0%) to suit the Thai economy. The Baht operates on a managed float regime, in which the BoT intervenes to prevent excess volatility.

Growth/Inflation Outlook: Real GDP for 4Q2011 fell by 9.0%yoy, after expanding a revised 3.7%yoy in 3Q2011. This was lower than our forecast of a 4.4%yoy decline and the Bloomberg consensus expectation of a 5.0%yoy fall. On a sequential basis, real GDP declined by 10.7%qoq seasonally adjusted in 4Q2011 from a revised 0.8%qoq growth in 3Q2011. For 2011, real GDP growth came in at 0.1%yoy, versus our forecast of 1.2%yoy and the Bloomberg consensus expectation of 1.0%yoy. We have adjusted upwards our 2012 GDP growth forecast to 5.7% from 4.6%, largely as a result of the lowered base in 2011; this does not reflect a change in view. Thailand's February headline CPI inflation came in at 3.35%yoy, similar to January's reading of 3.38%yoy.

Monetary Policy Forecast: The Bank of Thailand (BoT) cut rates by 25bp to 3.00% at its January meeting to aid the flood recovery process. We expect rates to remain on hold for now and expect Bank of Thailand to hike rates by 50bp towards the end of the year, as the post-flood recovery gains momentum, which could also underpin rising inflationary pressures.

Fiscal Policy Outlook: The cabinet has approved the increase in the budget deficit for FY2012 to Bt400bn from Bt350bn to cope with the increase in flood relief expenditure. The increased spending plans look tenable in the near term given Thailand's low public debt to GDP ratio, at around 40%. However, the trajectories do cast doubt on the country's medium-term target of achieving a primary surplus by FY2016.

Balance of Payments Situation: The current account balance should narrow this year, led by waning export momentum, although it is still likely to remain in positive territory.

Things to Watch: The speed and efficiency surrounding the execution of the post-flood reconstruction plans will be closely watched. Continued political stability is key to providing the stable backdrop needed for longer-term infrastructure investment projects.

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81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13

US$/Thai Baht

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GSDEER

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% GDP4-qtr ma

Thailand: BBoP vs Current Account

CA

BBoP

Mark Tan

38


March 2012

Americas%

Current* Forward Forecast Forward Forecast Forward ForecastUS 3M 0.5 0.4 0.4 0.5 0.3 0.6 0.3

10Y 2.0 2.1 2.5 2.1 2.5 2.3 2.8Canada 3M 1.4 1.2 1.3 1.3 1.3 1.3 1.3

10Y 2.0 2.1 2.5 2.2 2.8 2.3 3.0Argentina 3M 14.7 na 11.0 na 11.0 na 10.0Brazil 3M 9.8 na 9.0 na 9.0 na 9.5Chile 3M 5.0 na 4.3 na 4.0 na 4.3Mexico 3M 4.5 na 4.0 na 4.0 na 4.0

3-Month Horizon 6-Month Horizon 12-Month Horizon

Europe%

Current* Forward Forecast Forward Forecast Forward ForecastEuroland 3M 0.9 0.6 1.2 0.7 1.2 0.7 1.2

10Y 1.8 1.9 2.5 2.0 2.8 2.1 2.8UK 3M 1.0 1.7 1.0 1.2 0.9 1.2 0.8

10Y 2.2 2.3 2.3 2.4 2.5 2.5 3.0Sweden 3M 2.3 1.9 1.8 1.7 1.8 1.7 1.7

10Y 1.8 1.8 2.0 1.8 2.3 1.9 2.3Norway 3M 2.6 2.6 2.7 2.5 2.6 2.6 2.4

10Y 2.4 2.2 2.8 2.3 2.8 2.3 3.0Switzerland 3M 0.1 0.2 0.0 0.2 0.0 0.2 0.0

10Y 0.7 0.7 1.1 0.7 1.2 0.8 1.3Poland 3M 4.9 4.9 5.0 4.8 5.1 4.7 5.1

5Y 4.9 4.9 5.2 5.0 5.3 5.1 5.3Czech Republic 3M 1.2 1.1 1.1 1.1 1.1 1.1 1.2

5Y 2.0 2.1 2.1 2.3 2.3 2.7 2.5Hungary 3M 7.3 7.4 7.8 7.2 7.8 7.0 7.3

5Y 8.6 8.6 8.7 8.7 8.7 8.8 8.9Russia 3M 4.7 4.8 5.5 5.4 5.5 5.5 5.5Turkey 3M 9.9 10.0 12.3 9.4 10.5 8.9 9.4


South Africa 3M 5.6 5.6 5.5 5.7 5.6 6.1 6.25Y 6.9 7.1 7.5 7.3 7.6 7.6 8.3

Interest Rate Forecasts

Asia%

Current* Forward Forecast Forward Forecast Forward ForecastJapan 3M 0.2 0.5 0.4 0.3 0.4 0.3 0.4

10Y 1.0 1.0 1.1 1.1 1.2 1.2 1.4Australia 3M 4.5 4.5 3.9 4.1 4.0 4.1 4.5

10Y 3.9 4.0 4.0 4.0 4.3 4.1 4.5New Zealand 3M 2.9 2.8 2.7 2.8 2.9 3.1 3.4

10Y 4.1 na 4.3 na 4.5 na 4.6Hong Kong 3M 0.4 0.4 0.1 0.4 0.1 0.5 0.0Indonesia 3M 4.2 3.9 5.0 4.0 5.0 4.6 5.0India 3M 9.1 8.5 8.2 8.1 7.7 8.2 7.2Taiwan 3M 0.9 0.9 0.7 0.9 0.7 0.9 0.8Korea 3M 3.5 3.5 3.6 3.5 3.6 3.5 3.8Philippines 3M 3.0 3.4 1.1 2.6 1.1 2.3 1.3Singapore 3M 0.4 0.8 0.4 0.9 0.4 0.4 0.4Thailand 3M 3.1 3.2 3.0 3.3 3.0 3.2 3.5

Close 07 March 12, mid-rates for major markets. We are currently using June 2012, September 2012 and March 2013 contracts for 3-month forw ard rates. Source: GS Global ECS Research


39


March 2012

GS Sentiment Index

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10

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EUR/US$Index EUR/US$ vs GS Sentiment Index

Sentiment Index (lhs)

EUR/US$ (rhs)

70

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90

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140

-10

-8

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0

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8

10

01 02 03 04 05 06 07 08 09 10 11 12

US$/YENIndex US$/YEN vs GS Sentiment Index

Sentiment Index (lhs)

US$/YEN (rhs)

The possible range is +/-10. A value of +10 suggests bullish sentiment for the first currency of the pair (i.e., bullish EUR in EUR/$ and bullish $ in $/Yen). We would generally regard the index as a reverse indicator, i.e., high numbers are indicative of excessive positive sentiment and vice versa.

Current Last Week* Current Last Week* Current Last Week* Current Last Week*

EUR/$ 7.8 9.2 3.9 5.6 -9.5 -9.8 0.7 1.7

$/Yen 6.0 6.2 5.9 3.1 4.9 0.8 5.6 3.4

IMM PositioningBull/Bear CommentsRisk Reversals Average

Source: Goldman Sachs Global ECS Research

40


March 2012

-60%

-40%

-20%

0%

20%

40%

60%

-12.00

-10.00

-8.00

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

10.00

Jan-08 Aug-08 Mar-09 Oct-09 May-10 Dec-10 Jul-11 Feb-12

%Score EUR

Positioning Score [-10,+10]Net Position (% of Open Interest) [RHS]

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

-12.00

-10.00

-8.00

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

10.00


%Score JPY


-80%

-60%

-40%

-20%

0%

20%

40%

60%

-12.00

-10.00

-8.00

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

10.00

12.00


%Score GBP


-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

-12.00

-10.00

-8.00

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

10.00


%Score CHF


-60%

-40%

-20%

0%

20%

40%

60%

-10.00

-8.00

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

10.00


%Score CAD


-60%

-40%

-20%

0%

20%

40%

60%

80%

-10.00

-8.00

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

10.00


%Score AUD


-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

-10.00

-8.00

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

10.00


%Score MXN


-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

-12.00

-10.00

-8.00

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

10.00


%Score NZD


GS Sentiment Index (IMM)

Source: Bloomberg, Goldman Sachs Global ECS Research

41


March 2012

FX Currents The Carry FX Current (Bloomberg: GSIMCAR1 Index) is built to capture the performance of carry-based trading strategies in FX. In the long run, the return on holding high carry currencies tends to outperform low carry currencies. However, at times of high risk aversion, carry trades tend to post heavy losses. The Carry Current performed poorly in 2011, falling 2.3% over the course of the year, but has risen by nearly 4% since the beginning of 2012.

Methodology: Our FX Currents, formerly ‘FX Slices’, are portfolios of currencies adjusted for carry and are designed to capture and identify themes that the market is trading. For some, the composition is adjusted once a month or on a rolling 3-month basis according to the evolution of the ranking in the macro variables. A ranking schedule is applied to the currencies, placing a 20% weight on the four top/bottom-ranked currencies, 15% for the fifth rank and 5% for the sixth-ranked currency. The BRICs/N-11 FX Current has a static, equally-weighted composition. See our Global Viewpoint from July 20, 2009, and our 2005 and 2006 issues of The Foreign Exchange Market for details.

The Current Account FX Current (Bloomberg: GSCUCACC Index) aims to capture the performance of current account geared trading strategies in FX. In an environment of slower global capital flows, one would expect current account surplus currencies to outperform current account deficit currencies. Owing to a deterioration in global risk sentiment, the Current Account Current rose 2% in 2011. However, it reversed course towards the end of last year and fell over 2% through early February, and has since moved sideways..

The Valuation Current (Bloomberg: GSCUVALU Index) is our FX Current built to capture the performance of undervalued currencies relative to overvalued currencies, using our GSDEER model as a valuation anchor. After experiencing significant volatility in August and September of last year, it has risen steadily over the past few months and is up 1.3% year-to-date.

Short LongTRY SEKNZD TWDINR MYRPLN NOKGBP CHFZAR SGD

Composition of Current Account Current

Short LongBRL SGDJPY MYRNZD TWDINR CLPCHF ZARPHP NOK

Composition of Valuation Current

95

105

115

125

135

145

155

2004 2005 2006 2007 2008 2009 2010 2011 2012

Index,1/1/04=100

Relative Performance of HighYielding Currencies

FX G10 & Emerging Markets Carry Current

85

87

89

91

93

95

97

99

101

103

2004 2005 2006 2007 2008 2009 2010 2011 2012

Index,1/1/04=100

Relative Performance of Currencies in Current Account Surplus FX

FX Current Account Current

94

96

98

100

102

104

106

108

110

112

114

2004 2005 2006 2007 2008 2009 2010 2011 2012

Index,1/1/04=100

Relative Performance of Undervalued FX Based on GSDEER Valuation

FX Valuation Current

Short LongCHF HUFJPY IDRCNY RUBCZK ZARTWD BRLEUR INRSGD TRY

Composition of the Carry Current


42


March 2012

FX Currents

This Energy FX Current (Bloomberg: GSIMENE1 Index) is created to take advantage of terms-of-trade gains and losses from shifts in energy prices between commodity producers and commodity consumers. Basically, this Current is long a list of currencies from energy-exporting countries and short a portfolio of currencies that are heavy importers of energy products. After experiencing significant volatility in 2011, the Energy Current is up 2.1% in 2012 to date. We expect this Current to continue appreciating over the medium term, given our Commodities Strategists’ structurally bullish commodity outlook.

The GDP FX Current (Bloomberg: GSCUGROW Index) is built to capture the performance of currencies from high cyclical growth economies relative to currencies from low cyclical growth economies. In theory, strong cyclical growth should lead to FX outperformance. Growth was one of the best-performing themes from the beginning of the turmoil in July 2007 through May 2010, during which the GDP Current was up by over 14.2%. It reversed direction in mid-2010 and fell nearly 5% in 2011, but has risen 1.6% in 2012 thus far.

The BRICs/N-11 FX Current (Bloomberg: GSIMBRI1 Index) measures the outperformance of the BRICs and N-11 currencies against the G10 currencies. As the BRICs and N-11 are the emerging markets with the most substantial long-term growth potential, we would generally be inclined to recommend trading this Current from the long side. However, we have observed that the BRICs and N-11 trade can come under pressure during times of slow global growth. The BRICs/N-11 Current fell 1.8% over the course of 2011, but has recovered over 1.9% since the start of 2012.

95

100

105

110

115

120

125

2004 2005 2006 2007 2008 2009 2010 2011 2012

Index,1/1/04=100

Relative Performance of High Growth FX

FX Growth Current

96

98

100

102

104

106

108

110

112

114

116

2004 2005 2006 2007 2008 2009 2010 2011 2012

Index,1/1/04=100

Relative Performance of Selected Energy-Exporting to Importing Currencies

FX Energy Current

98

100

102

104

106

108

110

112

114

116

118

2004 2005 2006 2007 2008 2009 2010 2011 2012

Index,1/1/04=100

Relative Performance of BRIC/N11 Currencies to G10 Currencies

FX BRIC/N11 Current

Short LongSGD ILSTWD IDRCZK SEKJPY NOK

KRW MXNGBP TRY

Composition of GDP Current

Short LongINR AUDJPY CAD

KRW MXNSGD NOKTWD RUB

Composition of the Energy Current

Short LongAUD BRLCAD CNYCHF IDREUR INRGBP KRWJPY MXNNOK PHPNZD RUBSEK TRY

Composition of the BRIC/N11 Current


43


March 2012

GS Trade-Weighted Indices

Forecasts for Nominal GS TWIsLatest

2009 2010 2011 07-Mar-12 3m 6m 12m 3m 6m 12m current Misal*US Dollar 215.6 209.4 200.6 204.8 205.1 201.6 196.2 0.2 -1.5 -4.2 227.8 -10.1

Euro 300.7 280.2 282.5 273.0 280.3 284.3 287.9 2.7 4.2 5.5 268.4 1.7

Japanese Yen 421.0 436.3 462.9 459.4 460.6 460.5 465.3 0.3 0.2 1.3 377.7 21.6

British Pound 80.6 80.3 79.9 81.2 78.9 79.8 80.9 -2.9 -1.8 -0.4 84.3 -3.6

Norw egian Kroner 88.5 92.6 95.1 97.2 97.6 98.0 99.8 0.5 0.9 2.7 130.9 -25.8

Sw edish Krona 59.3 63.7 67.4 67.1 66.5 67.6 68.6 -0.8 0.8 2.3 70.1 -4.3

Sw iss Franc 162.5 173.4 195.7 196.7 184.4 185.8 187.5 -6.2 -5.5 -4.7 169.9 15.8

Czech Koruna 167.4 170.9 176.1 172.7 159.1 162.3 170.8 -7.9 -6.0 -1.1 183.9 -6.1

Hungarian Forint 69.1 68.4 67.8 63.4 55.5 54.2 59.0 -12.4 -14.4 -6.9 61.8 2.5

Polish Zloty 68.8 72.4 70.5 68.7 60.6 62.1 67.8 -11.7 -9.6 -1.2 75.4 -8.9

Russian Ruble 2.559 2.683 2.667 2.737 2.857 2.866 2.819 4.4 4.7 3.0 2.610 4.9

Turkish Lira 0.0111 0.0115 0.0100 0.0096 0.0096 0.0092 0.0086 0.5 -4.5 -9.9 0.0077 24.5

Israeli Shekel 0.111 0.117 0.118 0.113 0.115 0.113 0.113 1.2 -0.7 -0.5 0.116 -2.1South African Rand 11.07 12.47 12.09 11.67 12.0 11.9 11.1 3.1 1.8 -5.2 14.88 -21.6Argentine Peso 0.0114 0.0104 0.0094 0.0092 0.0092 0.0086 0.0078 -0.9 -6.3 -15.9 0.0144 -36.0Brazilian Real 0.286 0.322 0.330 0.320 0.307 0.296 0.285 -3.9 -7.4 -10.8 0.217 47.4

Canadian Dollar 111.8 122.8 125.7 125.2 126.2 127.9 129.1 0.8 2.2 3.1 113.7 10.2

Mexican Peso 0.198 0.209 0.209 0.200 0.203 0.202 0.209 1.3 1.0 4.3 0.209 -4.0

Chilean Peso 31.5 33.9 34.6 34.5 34.6 34.7 35.0 0.1 0.3 1.3 45.8 -24.5

Peruvian New Sol 33.6 35.3 34.8 36.3 36.6 36.1 35.9 0.8 -0.6 -1.1 34.6 5.0

Colombian Peso 7.393 8.651 8.702 9.168 9.110 9.045 9.186 -0.6 -1.3 0.2 8.904 3.0

Venezuela Bolivar 0.370 0.185 0.178 0.179 0.180 0.179 0.177 0.5 0.0 -1.2 0.169 6.1

Australian Dollar 71.8 80.7 86.5 89.4 90.0 88.4 86.4 0.6 -1.1 -3.4 83.4 7.3Chinese Yuan 25.0 24.3 24.3 25.4 25.6 25.3 25.3 0.8 -0.3 -0.4 25.3 0.4Hong Kong Dollar 93.8 91.5 87.1 87.3 86.9 85.8 84.1 -0.4 -1.7 -3.7 117.7 -25.9Indian Rupee 20.29 21.08 19.96 18.72 17.5 18.0 18.3 -6.6 -3.9 -2.4 15.60 20.0Korean Won 40.0 42.7 42.7 42.5 41.4 43.5 44.4 -2.6 2.5 4.4 37.6 13.1Malaysian Ringgit 63.0 66.6 67.0 68.5 68.9 68.4 67.5 0.6 -0.2 -1.4 86.8 -21.1

New Zealand Dollar 67.6 73.1 75.7 78.1 77.8 77.7 79.1 -0.4 -0.5 1.2 68.4 14.2

Singapore Dollar 187.5 193.4 201.3 202.4 204.3 204.5 204.1 1.0 1.0 0.8 238.5 -15.1

Taiw an Dollar 112.8 114.5 117.1 117.4 118.1 118.1 116.6 0.6 0.6 -0.7 151.7 -22.6

Thai Baht 62.0 64.7 64.0 63.8 64.0 63.6 63.0 0.2 -0.3 -1.3 59.0 8.2

Indonesian Rupiah 5.117 5.594 5.529 5.353 5.430 5.408 5.368 1.4 1.0 0.3 5.014 6.8

Philippine Peso 15.41 15.77 15.71 15.98 15.92 15.79 15.65 -0.4 -1.2 -2.0 13.24 20.7Source: GS Global ECS Research *Spot misalignment from GSDEER TWI in %

GSDEER TWIYear AverageJan 1980=100 Forecasts Percentage Change

44


March 2012

GS Trade-Weighted Indices

0

50

100

150

200

250

300

350

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

Index1980=100

GS TWI: Euro

Nominal TWI

GSDEER TWI

TWI Appreciation

60

70

80

90

100

110

120

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

Index1980=100 GS: TWI Sterling

Nominal TWI

GSDEER TWITWI Appreciation

80

100

120

140

160

180

200

220

240

260

280

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

Index 1980=100

GS TWI: US Dollar

Nominal TWI

GSDEER TWI

TWI Appreciation

50

60

70

80

90

100

110

120

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

Index1980=100

GS TWI: Australian Dollar

Nominal TWI

GSDEER TWI

TWI Appreciation

0.0

0.1

0.2

0.3

0.4

0.5

0.6

94 96 98 00 02 04 06 08 10 12 14

Index1980=100

GS TWI: Brazilian Real

Nominal TWIGSDEER TWI

TWI Appreciation

80

100

120

140

160

180

200

220

240

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

Index1980=100 GS TWI: Swiss Franc

Nominal TWI

GSDEER TWI

TWI Appreciation

0

50

100

150

200

250

300

350

400

450

500

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

Index1980=100

GS TWI: Japanese Yen

Nominal TWI

GSDEER TWI

TWI Appreciation

10

20

30

40

50

60

70

80

90

100

110

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

Index1980=100

GS TWI: Chinese Yuan

Nominal TWI

GSDEER TWI

TWI Appreciation


45


March 2012

GS Anecdotal Flows M&A Pipelines

Source: Thomson Financial SDC, Goldman Sachs Global ECS Research. M&A Cash Pipelines show the value of the cash parts in all pending cross-border acquisitions. They represent potential flows, not actual flows. If a deal is withdrawn, it will be removed from the pipeline. The pipeline provides no information on the timing of foreign exchange flows.

*Pending United States outflow=-ve; Latest: US$ -12.9bn

Cash M&A Pipeline:Net bilateral: United States & REST OF WORLD*

-60

-40

-20

0

20

40

60

00 01 02 03 04 05 06 07 08 09 10 11 12

US$ bn

*Pending Euro area outflow=-ve; Latest: US$ 10.8bn

Cash M&A Pipeline:Net bilateral: Euro area & REST OF WORLD*

-100

-80

-60

-40

-20

0

20

00 01 02 03 04 05 06 07 08 09 10 11 12

US$ bn

*Pending Japan outflow=-ve; Latest: US$ -18.8bn

Net bilateral: Japan & REST OF WORLD*Cash M&A Pipeline:

-40

-30

-20

-10

0

10

20

00 01 02 03 04 05 06 07 08 09 10 11 12

US$ bn

*Pending Canada outflow=-ve; Latest: US$ -6.1bn

Cash M&A Pipeline:Net bilateral: Canada & REST OF WORLD*

-15

-10

-5

0

5

10

15

20

25

00 01 02 03 04 05 06 07 08 09 10 11 12

US$ bn

*Pending Switzerland outflow=-ve; Latest: US$ -9.4bn

Cash M&A Pipeline:Net bilateral: Switzerland & REST OF WORLD*

-60

-50

-40

-30

-20

-10

0

10

00 01 02 03 04 05 06 07 08 09 10 11 12

US$ bn

*Pending United Kingdom outflow=-ve; Latest: US$ -14.2bn

Cash M&A Pipeline:Net bilateral: United Kingdom & REST OF WORLD*

-50

-40

-30

-20

-10

0

10

20

30

40

00 01 02 03 04 05 06 07 08 09 10 11 12

US$ bn

46


March 2012

GS Anecdotal Flows M&A Pipelines

Source: Thomson Financial SDC, Goldman Sachs Global ECS Research. M&A Cash Pipelines show the value of the cash parts in all pending cross-border acquisitions. They represent potential flows, not actual flows. If a deal is withdrawn it will be removed from the pipeline. The pipeline provides no information on the timing of foreign exchange flows.

*Pending Australia outflow=-ve; Latest: US$ 4.5bn

Cash M&A Pipeline:Net bilateral: Australia & REST OF WORLD*

-10

-5

0

5

10

15

20

25

00 01 02 03 04 05 06 07 08 09 10 11 12

US$ bn

*Pending New Zealand outflow=-ve; Latest: US$ 1bn

Cash M&A Pipeline:Net bilateral: New Zealand & REST OF WORLD*

-3

-2

-1

0

1

2

3

4

00 01 02 03 04 05 06 07 08 09 10 11 12

US$ bn

*Pending Sweden outflow=-ve; Latest: US$ -7.2bn

Cash M&A Pipeline:Net bilateral: Sweden & REST OF WORLD*

-15

-10

-5

0

5

10

15

00 01 02 03 04 05 06 07 08 09 10 11 12

US$ bn

*Pending Norway outflow=-ve; Latest: US$ 3.4bn

Cash M&A Pipeline:Net bilateral: Norway & REST OF WORLD*

-4

-3

-2

-1

0

1

2

3

4

5

6

00 01 02 03 04 05 06 07 08 09 10 11 12

US$ bn

*Pending China outflow=-ve; Latest: US$ 7bn

Cash M&A Pipeline:Net bilateral: China & REST OF WORLD*

-5

0

5

10

15

20

25

30

00 01 02 03 04 05 06 07 08 09 10 11 12

US$ bn

*Pending India outflow=-ve; Latest: US$ 8.7bn

Cash M&A Pipeline:Net bilateral: India & REST OF WORLD*

-5

0

5

10

15

20

25

00 01 02 03 04 05 06 07 08 09 10 11 12

US$ bn

47


March 2012

GSDEER

GSDEER Values and Misalignment for USD CrossesSpot

07-Mar-12 4Q11* Current (1Q12)* 2Q12 4Q13 Bilateral1

Trade-Weighted1

G3EUR/$ 1.31 1.20 1.20 1.20 1.20 9.8%$/JPY 81.2 106.6 105.7 105.3 105.3 30.1% 22.3%EMEA£/$ 1.57 1.50 1.51 1.50 1.51 4.3% -3.0%$/NOK 5.65 4.81 4.72 4.60 4.55 -16.5% -23.0%$/SEK 6.78 6.76 6.78 6.83 6.87 -0.1% -5.2%$/CHF 0.92 1.18 1.17 1.17 1.14 27.9% 17.3%$/CZK 18.89 19.18 19.28 19.33 19.26 2.0% -6.1%$/HUF 224.7 235.9 241.2 242.5 258.0 7.3% -1.3%$/PLN 3.16 3.08 3.09 3.11 3.14 -2.3% -10.4%$/RUB 29.69 34.01 33.88 33.82 35.01 14.1% 4.4%$/TRY 1.78 2.23 2.29 2.31 2.47 28.3% 17.6%$/ILS 3.80 4.08 4.09 4.12 4.10 7.7% -0.9%$/ZAR 7.61 6.33 6.35 6.41 6.74 -16.6% -24.3%Americas $/ARS 4.34 3.02 3.06 3.09 3.51 -29.4% -39.7%$/BRL 1.77 2.57 2.58 2.58 2.80 46.0% 41.9%$/CAD 1.00 1.15 1.15 1.14 1.14 14.9% 10.4%$/MXN 12.89 12.72 12.69 12.74 13.14 -1.5% -6.2%$/CLP 489.3 422.0 415.9 413.2 412.0 -15.0% -21.8%$/PEN 2.67 3.15 3.11 3.14 3.09 16.3% 7.0%$/COP 1769 1961 1948 1949 1973 10.2% 4.2%$/VEF 4.30 3.98 4.19 4.35 5.87 -2.4% -7.8%AsiaAUD/$ 1.06 0.87 0.87 0.87 0.88 20.9% 8.5%$/CNY 6.32 7.03 7.04 7.10 6.96 11.4% 1.4%$/HKD 7.76 6.24 6.18 6.25 6.51 -20.4% -27.4%$/INR 50.34 63.00 62.90 63.87 66.79 25.0% 16.4%$/KRW 1124 1348 1357 1396 1419 20.7% 10.5%$/MYR 3.03 2.63 2.64 2.63 2.67 -12.7% -20.5%NZD/$ 0.82 0.64 0.64 0.64 0.64 28.7% 14.6%$/SGD 1.26 1.13 1.15 1.15 1.19 -8.9% -16.4%$/TWD 29.55 25.32 25.36 25.55 25.52 -14.2% -23.1%$/THB 30.72 36.00 36.31 36.65 37.52 18.2% 6.9%$/IDR 9157 10454 10429 10514 10979 13.9% 5.0%$/PHP 42.87 54.84 55.08 55.13 56.64 28.5% 19.0%USD TWI 204.76 225.77 225.85 225.23 227.68 -9.3%


* "Current" represents the current quarter, the column left of current represents the last quarter to be updated w ith over 75% of actual data.

GSDEER Misalignment

1 Bilateral misalignments are reported for the second currency in the pair w ith the exception of EUR/$, GBP/$, AUD/$, and NZD/$. A negative misalignment indicates that a currency is undervalued relative to its anchor currency. A negative trade-w eighted misalignment indicates that a currency is undervalued on a broad basis. That is, the $/JPY biateral misalignment show s the misalignment of the JPY against the USD, w ith a negative figure indicating undervaluation of the JPY.

48


March 2012

GSDEER

GSDEER Values and Misalignment for Euro CrossesSpot

07-Mar-12 4Q11* Current (1Q12)* 2Q12 4Q13 Bilateral1

Trade-Weighted1

G3EUR/$ 1.31 1.20 1.20 1.20 1.20 9.8%EUR/JPY 106.8 127.5 126.6 126.4 126.6 18.5% 22.3%EMEAEUR/GBP 0.84 0.80 0.79 0.80 0.80 -5.0% -3.0%EUR/NOK 7.43 5.75 5.65 5.53 5.47 -23.9% -23.0%EUR/SEK 8.92 8.09 8.12 8.19 8.26 -9.0% -5.2%EUR/CHF 1.21 1.41 1.40 1.40 1.37 16.6% 17.3%EUR/CZK 24.84 22.95 23.09 23.20 23.14 -7.0% -6.1%EUR/HUF 295.5 282.2 288.9 291.0 310.0 -2.2% -1.3%EUR/PLN 4.16 3.68 3.70 3.73 3.77 -11.0% -10.4%EUR/RUB 39.03 40.68 40.58 40.60 42.06 4.0% 4.4%EUR/TRY 2.34 2.67 2.74 2.78 2.97 16.9% 17.6%EUR/ILS 5.00 4.88 4.90 4.95 4.92 -1.9% -0.9%EUR/ZAR 10.01 7.57 7.61 7.69 8.10 -24.0% -24.3%Americas EUR/ARS 5.70 3.62 3.67 3.70 4.22 -35.7% -39.7%EUR/BRL 2.33 3.07 3.09 3.10 3.36 33.0% 41.9%EUR/CAD 1.31 1.38 1.37 1.37 1.38 4.7% 10.4%EUR/MXN 16.95 15.21 15.20 15.29 15.78 -10.3% -6.2%EUR/CLP 643.3 504.7 498.2 495.9 495.0 -22.5% -21.8%EUR/PEN 3.51 3.77 3.72 3.76 3.71 5.9% 7.0%EUR/COP 2325 2345 2334 2339 2370 0.4% 4.2%EUR/VEF 5.65 4.76 5.02 5.22 7.05 -11.1% -7.8%AsiaEUR/AUD 1.24 1.37 1.37 1.38 1.36 10.1% 8.5%EUR/CNY 8.31 8.41 8.43 8.52 8.36 1.5% 1.4%EUR/HKD 10.21 7.46 7.40 7.50 7.82 -27.5% -27.4%EUR/INR 66.18 75.35 75.35 76.65 80.25 13.9% 16.4%EUR/KRW 1478 1612 1626 1676 1705 10.0% 10.5%EUR/MYR 3.98 3.14 3.16 3.16 3.21 -20.5% -20.5%EUR/NZD 1.60 1.87 1.88 1.88 1.88 17.3% 14.6%EUR/SGD 1.65 1.35 1.37 1.38 1.43 -17.0% -16.4%EUR/TWD 38.86 30.29 30.38 30.66 30.66 -21.8% -23.1%EUR/THB 40.39 43.06 43.49 43.99 45.08 7.7% 6.9%EUR/IDR 12040 12504 12493 12619 13191 3.8% 5.0%EUR/PHP 56.36 65.59 65.98 66.17 68.05 17.1% 19.0%EUR TWI 272.96 266.59 267.20 268.20 270.03 2.2%


1 Bilateral misalignments are reported for the second currency in the pair w ith the exception of EUR/$, GBP/$, AUD/$, and NZD/$. A negative misalignment indicates that a currency is undervalued relative to its anchor currency. A negative trade-w eighted misalignment indicates that a currency is undervalued on a broad basis. That is, the $/JPY biateral misalignment show s the misalignment of the JPY against the USD, w ith a negative f igure indicating undervaluation of the JPY.* "Current" represents the current quarter, the column left of current represents the last quarter to be updated w ith over 75% of actual data.

GSDEER Misalignment

49


March 2012

Key Economic Data GDP Growth (% ch yoy)

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 (f) 12 (f) 13 (f)

G3

USA 3.74 4.46 4.36 4.83 4.14 1.08 1.81 2.54 3.47 3.07 2.66 1.91 -0.34 -3.49 3.03 1.72 2.09 2.16

Euro area 1.48 2.61 2.67 2.80 3.91 1.98 0.92 0.73 1.99 1.79 3.35 2.98 0.27 -4.20 1.81 1.55 -0.41 0.68

Japan 2.61 1.60 -2.00 -0.20 2.26 0.36 0.29 1.69 2.36 1.30 1.69 2.19 -1.04 -5.53 4.44 -0.79 2.03 1.52

EMEA

Czech Republic 4.03 -0.89 -0.22 1.51 4.56 3.08 2.05 3.77 4.59 6.83 7.23 5.72 2.89 -4.54 2.58 1.67 0.28 2.47

France 1.05 2.17 3.41 3.18 3.87 1.79 0.95 0.89 2.35 1.87 2.66 2.23 -0.20 -2.63 1.38 1.57 -0.13 0.98

Germany 0.85 1.82 1.67 1.77 3.33 1.67 0.03 -0.38 0.70 0.83 3.89 3.39 0.81 -5.08 3.56 3.02 0.92 1.48

Hungary 1.31 4.60 4.90 4.20 5.20 3.80 3.50 3.98 4.52 3.17 3.63 0.77 0.83 -6.81 1.36 1.44 -0.45 1.78

Israel 5.63 2.87 0.00 3.39 9.27 -0.25 -0.58 1.51 4.84 4.94 5.59 5.50 4.03 0.84 4.85 4.80 2.30 4.00

Italy 1.00 1.91 1.32 1.42 3.89 1.76 0.45 0.03 1.56 1.09 2.27 1.55 -1.16 -5.06 1.42 0.37 -1.33 0.02

Norway 6.41 5.38 2.70 2.01 3.50 1.74 1.50 0.96 3.95 2.60 2.44 2.70 0.02 -1.65 0.66 1.50 1.69 1.84

Poland 6.02 6.81 4.87 4.10 4.04 1.02 1.37 3.80 5.45 3.60 6.17 6.83 4.99 1.64 3.87 4.21 2.02 3.33

Russia -3.60 1.40 -5.30 6.40 10.00 5.10 4.70 7.30 7.20 6.40 8.20 8.50 5.20 -7.80 4.03 4.17 3.94 4.52

South Africa 4.31 2.65 0.52 2.36 4.15 2.74 3.67 2.95 4.55 5.28 5.60 5.55 3.62 -1.54 2.89 3.05 2.24 3.46

Spain 2.41 3.87 4.47 4.75 5.09 3.67 2.71 3.09 3.26 3.58 4.08 3.48 0.89 -3.72 -0.07 0.68 -1.18 -0.15

Sweden 1.63 2.92 4.11 4.39 4.60 1.42 2.50 2.48 3.70 3.15 4.56 3.43 -0.77 -5.13 5.32 4.63 2.15 2.39

Switzerland … … 2.64 1.31 3.58 1.15 0.44 -0.20 2.53 2.64 3.63 3.64 2.10 -1.88 2.71 1.61 -1.06 1.28

Turkey 7.38 7.58 2.31 -3.40 6.80 -5.70 6.20 5.30 9.40 8.40 6.90 4.70 0.70 -4.80 9.00 7.80 0.80 6.80

UK 2.89 3.42 3.84 3.66 4.46 3.15 2.66 3.52 2.96 2.09 2.61 3.47 -1.10 -4.37 2.09 0.89 1.09 2.32

AMERICAS

Argentina 5.53 8.11 3.85 -3.39 -0.79 -4.41 -10.89 8.84 9.03 9.18 8.47 8.65 6.76 0.85 9.16 8.69 3.67 4.69

Brazil 2.15 3.37 0.04 0.25 4.31 1.31 2.66 1.15 5.71 3.16 3.96 6.10 5.17 -0.33 7.53 3.01 2.81 4.12

Canada 1.62 4.23 4.10 5.53 5.23 1.78 2.92 1.88 3.12 3.02 2.82 2.20 0.69 -2.77 3.21 2.36 2.17 2.49

Chile 7.20 7.60 3.40 -1.10 4.46 3.35 2.17 3.96 6.04 5.56 4.59 4.60 3.66 -1.68 5.20 6.38 4.15 5.15

Colombia 2.06 3.43 0.57 -4.20 3.12 1.68 2.50 3.92 5.33 4.71 6.70 6.90 3.55 1.45 4.29 5.70 4.04 5.11

Ecuador 1.98 3.38 0.41 -7.27 5.06 4.76 3.43 3.27 8.82 5.74 4.75 2.04 7.24 0.36 3.58 7.75 3.33 3.48

Mexico 5.14 6.78 4.91 3.87 6.60 -0.16 0.83 1.35 4.05 3.21 5.15 3.26 1.19 -6.12 5.39 3.78 2.78 3.93

Peru 2.49 6.84 -0.68 0.89 2.95 0.21 5.16 3.90 5.22 6.45 7.87 8.91 9.80 0.86 8.79 6.50 4.88 5.48

Venezuela -0.20 6.37 0.17 -6.09 3.69 3.39 -8.86 -7.76 18.29 10.32 9.87 8.75 5.28 -3.20 -1.49 3.97 3.99 2.92

ASIA

Australia 4.21 4.05 5.07 4.06 3.15 2.61 3.94 3.14 4.08 3.11 2.68 4.68 2.50 1.39 2.57 2.01 2.50 3.65

China 10.01 9.28 7.83 7.63 8.42 8.30 9.09 10.02 10.10 11.30 12.70 14.20 9.60 9.20 10.40 9.20 8.60 8.70

Hong Kong 4.20 5.10 -6.00 2.60 7.90 0.50 1.80 3.00 8.50 7.10 7.00 6.40 2.30 -2.70 7.00 5.00 3.60 4.90

India … … 6.70 6.40 4.40 5.80 3.80 8.50 7.50 9.50 9.60 9.30 6.80 8.00 8.50 6.90 7.20 7.80

Indonesia 7.82 4.70 -13.10 0.80 4.10 3.60 4.50 4.80 5.00 5.70 5.50 6.30 6.00 4.60 6.10 6.40 5.40 6.30

South Korea 6.75 5.01 -6.69 10.89 9.30 3.10 7.00 3.10 4.70 4.20 5.10 5.10 2.30 0.30 6.20 3.70 3.50 4.10

Malaysia 10.00 7.32 -7.36 6.10 8.30 0.30 4.40 5.30 7.23 5.00 5.80 6.20 4.70 -1.60 7.20 4.60 3.80 5.20

New Zealand 4.14 2.22 0.03 4.46 3.91 2.66 4.91 4.19 4.48 3.27 1.00 2.84 -0.07 -2.07 1.26 1.60 2.08 3.39

Philippines 5.80 5.20 -0.60 3.40 6.00 1.80 4.40 4.90 6.40 5.00 5.30 7.10 3.80 1.10 7.30 3.80 3.80 5.00

Singapore 7.80 8.30 -1.40 7.20 10.00 -2.30 4.00 2.90 8.70 6.60 8.20 7.80 1.80 -0.80 14.50 4.60 2.50 4.30

Taiwan 6.10 6.68 4.57 5.42 5.90 -2.20 3.60 3.30 6.07 4.10 4.90 5.70 0.70 -1.90 10.70 4.40 3.00 4.50

Thailand 5.93 -1.12 -10.77 4.20 4.60 1.90 5.40 6.90 6.17 4.50 5.10 4.90 2.50 -2.30 7.80 1.20 4.60 4.80

% ch yoy


50


March 2012

Consumer Prices (% ch yoy)

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 (f) 12 (f) 13 (f)

G3

USA 2.94 2.34 1.55 2.19 3.37 2.82 1.60 2.30 2.67 3.37 3.22 2.87 3.82 -0.33 1.65 3.14 2.07 1.66

Euro area 2.19 1.57 1.09 1.12 2.10 2.34 2.25 2.08 2.14 2.19 2.18 2.14 3.28 0.29 1.62 2.72 1.82 1.52

Japan 0.13 1.76 0.67 -0.33 -0.65 -0.80 -0.90 -0.25 -0.01 -0.27 0.24 0.06 1.37 -1.34 -0.72 -0.23 -0.13 0.08

EMEA

Czech Republic 8.80 8.46 10.65 2.13 3.90 4.69 1.81 0.10 2.82 1.87 2.53 2.83 6.37 1.04 1.47 1.88 2.93 2.21

France 2.62 1.28 0.67 0.56 1.83 1.78 1.94 2.17 2.34 1.90 1.91 1.61 3.15 0.11 1.74 2.30 2.01 1.68

Germany 1.19 1.53 0.60 0.64 1.40 1.90 1.35 1.03 1.79 1.92 1.78 2.28 2.75 0.23 1.15 2.48 1.48 1.73

Hungary 23.49 18.28 14.21 10.02 9.77 9.15 5.24 4.67 6.75 3.58 3.92 7.98 6.06 4.20 4.89 3.90 5.30 4.98

Israel 11.30 9.01 5.44 5.25 1.14 1.11 5.69 0.75 -0.38 1.34 2.09 0.53 4.57 3.34 2.70 3.50 2.30 2.20

Italy 3.95 1.63 1.98 1.66 2.58 2.32 2.61 2.81 2.27 2.21 2.22 2.04 3.50 0.76 1.64 2.90 2.33 1.32

Norway 1.25 2.58 2.27 2.33 3.09 3.02 1.29 2.48 0.47 1.52 2.33 0.73 3.77 2.17 2.40 1.30 1.14 1.62

Poland 19.85 15.00 11.87 7.23 10.10 5.50 1.99 0.90 3.49 2.13 1.03 2.49 4.22 3.45 2.58 4.19 3.51 2.23

Russia 47.75 14.74 27.66 85.72 20.80 21.50 15.90 14.80 10.90 12.50 9.70 9.00 14.10 11.70 6.79 8.46 5.81 6.10

South Africa 3.84 4.61 6.69 5.16 5.16 5.49 9.32 5.76 -0.86 2.11 3.18 6.08 9.92 7.15 4.29 4.99 6.00 6.17

Spain 3.57 1.89 1.76 2.23 3.48 2.83 3.59 3.10 3.05 3.38 3.56 2.84 4.13 -0.24 2.04 3.05 1.69 1.12

Sweden 0.00 0.52 -0.14 0.45 0.00 2.44 2.16 1.93 0.38 0.45 1.36 2.21 3.48 -0.32 1.27 2.64 1.96 2.23

Switzerland … 0.52 0.02 0.81 1.56 0.99 0.64 0.64 0.80 1.17 1.06 0.73 2.43 -0.48 0.69 0.46 0.21 0.43

Turkey 80.20 84.50 86.60 64.80 56.40 53.50 47.20 25.50 8.60 8.20 9.60 8.80 10.40 6.30 8.60 6.50 9.80 6.20

UK 2.48 1.78 1.59 1.34 0.79 1.24 1.26 1.36 1.34 2.05 2.33 2.32 3.61 2.17 3.29 4.48 2.52 1.85

AMERICAS

Argentina 0.05 0.33 0.66 -1.81 -0.94 -1.07 25.87 13.44 4.42 9.64 10.90 8.83 8.58 6.27 10.46 9.78 9.32 9.57

Brazil 15.76 6.93 3.20 4.86 7.04 6.84 8.45 14.71 6.60 6.87 4.18 3.64 5.68 4.89 5.04 6.64 5.64 5.15

Canada 1.57 1.62 1.00 1.73 2.72 2.53 2.26 2.76 1.86 2.21 2.00 2.14 2.37 0.30 1.78 3.00 2.16 2.00

Chile 7.39 6.30 5.35 3.30 3.84 3.57 2.49 2.81 1.05 3.05 3.39 4.41 8.72 1.48 1.41 3.34 3.85 3.09

Colombia 20.80 18.53 18.69 9.21 9.23 7.97 6.35 7.13 5.90 5.05 4.29 5.54 7.00 4.20 2.27 3.42 3.48 2.94

Ecuador 24.38 30.64 36.16 52.41 96.09 37.68 12.48 7.93 2.74 2.17 3.30 2.28 8.40 5.16 3.55 4.48 4.47 5.06

Mexico 34.38 20.63 15.93 16.59 9.49 6.37 5.03 4.55 4.69 3.99 3.63 3.97 5.12 5.30 4.16 3.41 4.30 3.21

Peru 11.55 8.52 7.28 3.47 3.74 1.98 0.19 2.26 3.66 1.62 2.00 1.78 5.79 2.94 1.53 3.37 3.41 2.52

Venezuela 99.90 50.00 35.78 23.50 16.21 12.53 22.43 31.09 21.75 15.95 13.65 18.70 31.45 28.59 29.06 27.15 25.75 33.51

ASIA

Australia 2.61 0.25 0.85 1.47 4.48 4.38 3.00 2.77 2.34 2.67 3.54 2.33 4.35 1.82 2.85 3.42 2.69 2.95

China 8.30 2.80 -0.80 -1.40 0.40 0.70 -0.80 1.20 3.90 1.80 1.50 4.80 5.90 -0.70 3.30 5.40 3.10 2.10

Hong Kong 6.30 5.80 2.79 -3.99 -3.68 -1.61 -3.00 -2.50 -0.40 0.90 2.00 2.10 4.30 0.60 2.40 5.30 3.80 4.40

India 4.60 4.40 5.90 3.30 7.10 3.70 3.40 5.50 6.50 4.40 6.60 4.70 8.10 3.80 9.60 8.70 5.00 5.00

Indonesia 7.97 6.73 57.64 20.70 3.80 11.50 11.80 6.80 6.10 10.50 13.10 6.70 9.80 4.80 5.10 5.40 5.00 5.20

South Korea 4.90 4.48 7.48 0.85 2.30 4.10 2.70 3.60 3.60 2.70 2.20 2.50 4.70 2.80 3.00 4.30 3.10 3.00

Malaysia 3.48 2.71 5.28 2.80 1.50 1.40 1.80 1.20 1.44 3.00 3.60 2.00 5.40 0.60 1.70 3.20 2.80 3.20

New Zealand 2.29 1.19 1.27 -0.11 2.62 2.63 2.68 1.75 2.29 3.04 3.37 2.38 3.96 2.12 2.30 4.03 1.66 2.23

Philippines 7.50 5.60 9.20 5.90 4.00 6.80 2.90 3.50 6.00 7.70 6.30 2.80 9.30 3.20 3.80 4.50 3.70 4.00

Singapore 1.40 2.00 -0.30 0.50 1.30 1.00 -0.40 0.50 1.70 0.50 1.00 2.10 6.60 0.60 2.80 5.20 3.20 3.60

Taiwan 3.07 0.90 1.68 0.18 1.30 0.00 -0.20 -0.30 1.61 2.30 0.60 1.80 3.50 -0.90 1.00 1.50 1.20 1.70

Thailand 5.83 5.61 8.08 0.30 1.60 1.70 0.60 1.80 2.78 4.50 4.60 2.20 5.50 -0.90 3.30 3.80 3.60 3.90

% ch yoy


51


March 2012

Current Account Balance (% of GDP)

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 (f) 12 (f) 13 (f)

G3

USA -1.59 -1.69 -2.45 -3.23 -4.18 -3.86 -4.30 -4.66 -5.30 -5.91 -5.98 -5.06 -4.74 -2.70 -3.24 -3.12 -3.09 -3.48

Euro area … … 0.34 -0.56 -1.54 -0.37 0.66 0.31 0.74 0.11 -0.14 0.08 -1.57 -0.31 -0.50 -0.56 -1.21 -1.42

Japan 1.40 2.24 3.03 2.59 2.53 2.11 2.83 3.16 3.70 3.62 3.92 4.83 3.27 2.82 3.56 2.04 1.66 1.81

EMEA

Czech Republic -6.71 -5.48 -2.20 -2.57 -4.64 -5.08 -5.31 -5.97 -5.04 -0.99 -2.00 -4.14 -2.03 -2.32 -3.00 -2.21 -2.75 -2.48

France … … … 3.16 1.43 1.76 1.19 0.79 0.51 -0.50 -0.57 -0.99 -1.75 -1.50 -1.75 -2.13 -1.23 -1.38

Germany -0.56 -0.44 -0.79 -1.32 -1.82 0.01 2.00 1.93 4.60 5.01 6.21 7.51 6.26 5.68 5.63 4.75 4.08 3.90

Hungary … … … … -8.65 -6.08 -6.99 -8.03 -8.66 -7.47 -7.40 -7.26 -7.34 -0.20 1.09 1.67 2.09 2.89

Israel -4.91 -3.02 -0.90 -1.72 -1.65 -1.65 -1.14 0.53 1.70 3.06 4.83 2.73 0.91 3.58 2.91 0.60 -0.60 1.70

Italy 3.11 2.83 1.84 1.02 -0.20 0.27 -0.43 -0.78 -0.33 -0.88 -1.49 -1.28 -2.87 -1.97 -3.48 -3.38 -2.41 -2.04

Norway … … … 5.42 14.88 16.07 12.56 12.31 12.64 16.10 17.04 13.84 17.60 12.41 13.57 15.85 20.18 20.35

Poland -6.28 -7.65 -9.40 -9.00 -6.04 -3.15 -2.83 -2.54 -5.26 -2.40 -3.83 -6.20 -6.56 -3.94 -4.66 -4.72 -4.28 -3.16

Russia 2.80 -0.02 0.16 12.64 18.01 11.08 8.44 8.21 10.07 11.09 9.54 5.96 6.10 4.02 4.75 5.51 4.62 3.34

South Africa -0.77 -1.12 -1.62 -0.51 -0.14 0.29 0.79 -1.04 -3.07 -3.45 -5.26 -6.98 -7.23 -3.96 -2.78 -3.54 -3.84 -3.01

Spain -0.23 -0.09 -1.18 -2.93 -3.96 -3.94 -3.26 -3.51 -5.25 -7.35 -8.96 -10.00 -9.62 -5.20 -4.60 -3.69 -2.93 -2.39

Sweden 3.48 4.08 3.80 4.11 4.15 5.02 4.69 6.97 6.56 6.76 8.42 9.25 8.78 7.07 7.01 7.94 8.27 8.10

Switzerland 7.01 9.32 9.23 10.85 12.05 8.20 8.81 13.29 13.38 14.09 14.87 8.95 2.33 11.41 15.60 15.85 14.99 14.84

Turkey … … 0.79 -0.16 -4.00 2.20 -0.35 -2.62 -3.56 -4.70 -6.10 -5.36 -6.75 -2.12 -6.45 -10.52 -5.14 -4.97

UK -0.81 -0.10 -0.37 -2.34 -2.65 -2.06 -1.71 -1.61 -2.07 -2.60 -3.24 -2.48 -1.38 -1.46 -3.32 -2.39 -1.73 -1.10

AMERICAS

Argentina -4.31 -2.00 -2.50 -4.17 -4.85 -4.21 -3.15 -1.41 8.30 6.36 2.11 2.91 3.65 2.83 3.62 0.09 0.45 -1.14

Brazil -0.33 -2.61 -3.03 -3.77 -4.24 -4.73 -3.77 -4.23 -1.55 0.75 1.75 1.58 1.25 0.11 -1.47 -2.15 -2.58 -2.37

Canada -2.30 -0.75 0.55 -1.29 -1.24 0.26 2.72 2.27 1.72 1.21 2.31 1.89 1.41 0.83 -2.96 -2.86 -1.89 -1.79

Chile -3.11 -2.14 -5.46 -4.92 -5.68 -0.10 -1.19 -1.60 -0.86 -1.05 2.17 1.23 4.87 4.54 1.59 -1.79 -2.13 -3.13

Colombia -4.43 -5.15 -4.89 -5.59 -5.33 0.37 0.80 -1.10 -1.32 -1.03 -0.78 -1.29 -1.83 -2.87 -2.11 -3.08 -2.90 -3.02

Ecuador -4.03 -5.60 -0.19 -2.32 -10.56 6.35 5.65 -3.13 -5.14 -1.49 -1.66 0.94 4.17 3.71 -0.16 -1.97 -2.89 -2.39

Mexico -7.03 -0.55 -0.75 -1.91 -3.80 -2.89 -2.79 -2.49 -2.01 -1.02 -0.69 -0.69 -0.47 -0.90 -0.72 -1.05 -1.44 -1.69

Peru -6.02 -8.61 -6.52 -5.70 -5.86 -2.85 -2.90 -2.23 -1.96 -1.55 0.03 1.45 3.11 1.36 0.17 -2.31 -1.87 -1.63

Venezuela 12.87 3.93 -3.40 3.40 10.11 1.61 8.17 14.12 13.74 17.63 14.42 7.53 10.86 1.83 5.05 8.90 4.64 5.52

ASIA

Australia -4.42 -4.89 -3.36 -2.81 -4.63 -5.24 -3.83 -2.01 -3.65 -5.27 -6.06 -5.73 -5.33 -6.18 -4.24 -2.33 -4.96 -5.38

China 1.40 0.20 0.80 3.10 2.90 1.90 1.70 1.30 2.40 2.80 3.55 5.90 8.60 11.00 5.20 4.30 3.80 3.70

Hong Kong 1.20 -4.40 -1.40 -4.40 1.50 6.30 4.10 5.90 7.60 10.40 9.50 11.40 12.10 12.30 8.60 2.50 1.90 1.50

India -1.00 -1.70 -1.20 -1.30 -1.00 -1.00 -0.60 0.70 1.20 2.30 -0.40 -1.20 -1.10 -1.40 -2.80 -3.40 -3.70 -3.70

Indonesia -1.67 -3.34 -3.41 -2.30 4.40 4.10 4.90 4.30 4.00 3.40 0.60 0.30 3.00 2.40 2.00 0.20 1.40 1.90

South Korea -0.96 -1.74 -4.44 -1.73 12.50 6.15 2.70 1.90 1.00 2.00 4.10 2.10 0.60 0.60 3.90 2.00 1.70 1.00

Malaysia -7.56 -9.73 -4.42 -5.93 13.20 15.90 9.40 8.30 8.50 12.90 12.57 15.20 16.30 15.70 16.50 11.30 10.50 11.40

New Zealand -4.02 -5.01 -5.86 -6.20 -3.66 -6.03 -4.50 -2.18 -3.56 -3.84 -5.66 -7.85 -8.24 -8.10 -2.48 -4.26 -6.28 -6.17

Philippines -4.59 -4.46 -4.77 -5.39 2.37 -3.79 -2.97 -2.45 -0.36 0.36 1.88 2.00 4.55 4.92 5.80 2.40 2.90 3.20

Singapore 15.40 17.00 14.90 17.40 22.00 17.10 11.60 14.20 12.70 23.30 17.00 19.00 21.80 23.40 19.10 18.60 14.80 10.40

Taiwan 2.66 2.07 3.91 2.43 1.29 2.91 2.90 6.40 9.10 10.20 5.74 4.60 7.20 8.60 11.40 8.40 7.90 8.40

Thailand -7.90 -2.04 12.74 10.20 7.50 5.40 5.50 5.60 4.25 -2.10 1.10 5.70 0.40 8.30 4.60 4.90 3.70 2.60


52


March 2012

Foreign Exchange Reserves (US$bn)

Pd end; US$bn 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

G3

US 30.8 36.0 32.2 31.2 29.0 33.8 39.7 42.7 37.8 40.9 45.8 49.6 50.5 52.1 51.9 52.3 Jan-12

Euro area - - 228.0 218.6 207.8 215.8 188.2 181.2 167.2 184.0 203.2 202.0 194.4 207.1 208.2 210.5 Jan-12

Japan 207.9 203.2 277.7 347.2 387.7 451.5 652.8 824.3 828.8 874.9 948.4 1003.7 997.0 1036.3 1221.3 1254.4 Jan-12

EMEA

Czech Republic 9.7 12.5 12.8 13.0 14.2 23.3 26.3 27.8 29.1 31.1 34.4 36.5 39.7 40.3 37.9 38.0 Jan-12

Euroland - - 228.0 218.6 207.8 215.8 188.2 181.2 167.2 184.0 203.2 202.0 194.4 207.1 208.2 210.5 Jan-12

Hungary 8.3 9.2 10.7 10.9 10.3 9.7 12.0 15.3 18.3 21.3 23.8 33.6 42.5 43.6 47.7 48.0 Jan-12

Israel 20.3 22.7 22.5 23.2 23.2 23.7 25.8 26.6 27.8 29.0 28.4 42.3 59.1 69.3 73.1 75.3 Jan-12

Norway 22.1 17.4 22.5 26.7 22.2 30.7 35.9 43.1 46.4 56.2 60.3 50.2 45.7 49.7 45.5 45.5 Dec-11

Poland 20.3 27.2 26.1 26.3 25.2 28.0 31.7 34.6 40.5 46.1 62.7 58.9 73.4 86.3 89.7 91.6 Jan-12

Russia 12.8 7.8 8.5 24.3 32.5 44.1 73.2 120.8 175.7 295.3 466.4 410.7 405.8 432.9 441.2 443.6 Jan-12

South Africa 4.8 4.2 6.1 5.8 5.8 5.6 6.2 12.8 18.3 22.7 29.2 30.2 32.4 35.4 39.8 39.8 Dec-11

Sweden 9.7 12.4 13.5 13.8 12.7 15.5 18.0 20.6 21.4 24.1 26.4 25.1 38.5 37.9 38.9 38.5 Jan-12

Switzerland 36.9 38.3 34.2 30.9 30.1 38.2 45.6 53.6 35.4 37.4 43.9 44.2 91.6 217.3 271.1 271.1 Dec-11

Turkey 18.6 19.4 23.2 22.3 18.7 26.9 33.8 35.5 50.4 60.7 73.2 70.2 69.2 79.0 76.7 74.7 Jan-12

UK 28.9 27.4 27.5 34.2 28.8 31.0 28.6 34.1 35.9 38.9 47.5 41.6 38.0 49.3 56.2 57.8 Jan-12

AMERICAS

Argentina 22.2 24.5 26.1 24.4 14.5 10.4 13.1 18.0 22.7 30.4 44.2 44.4 42.9 46.6 40.1 40.0 Jan-12

Brazil 50.8 42.6 35.3 32.4 35.6 37.2 48.8 52.5 53.2 85.1 179.4 192.8 231.9 280.6 343.4 346.1 Jan-12

Canada 15.1 19.9 24.4 29.0 30.5 32.7 31.5 30.2 30.7 33.2 39.3 41.5 42.6 44.9 52.8 53.2 Jan-12

Chile 17.3 15.3 14.2 14.7 14.0 14.8 15.2 15.5 16.7 19.2 16.7 22.8 23.8 26.3 40.1 40.1 Dec-11

Colombia 9.3 7.9 7.5 8.4 9.7 10.2 10.2 12.8 14.2 14.7 20.1 22.8 23.2 26.3 29.0 30.0 Jan-12

Ecuador 2.1 1.6 1.6 0.9 0.8 0.7 0.8 1.0 1.7 1.5 2.8 3.7 2.8 1.4 1.6 1.8 Jan-12

Mexico 28.1 31.5 31.0 35.1 44.4 49.9 57.7 62.8 73.0 75.4 86.3 94.0 94.1 114.9 137.5 141.8 Jan-12

Peru 11.0 9.6 8.7 8.4 8.7 9.3 9.8 12.2 13.6 16.7 26.9 30.3 31.0 41.7 46.1 46.1 Dec-11

US 30.8 36.0 32.2 31.2 29.0 33.8 39.7 42.7 37.8 40.9 45.8 49.6 50.5 52.1 51.9 52.3 Jan-12

Venezuela 14.0 11.6 11.7 12.6 8.8 8.0 15.5 17.9 23.5 28.9 23.7 32.6 17.7 9.2 - 3.0 Nov-11

ASIA

Australia 16.1 13.4 19.5 16.8 16.4 18.6 30.0 33.9 41.0 52.8 24.2 29.9 33.0 32.8 36.0 38.5 Jan-12

China 139.9 145.0 154.7 165.6 212.2 286.4 403.3 609.9 818.9 1066.3 1528.3 1946.0 2399.2 2847.3 3181.2 3181.1 Dec-11

Hong Kong 92.8 89.6 96.2 107.5 111.2 111.9 118.4 123.5 124.2 133.2 152.6 182.5 255.8 268.6 285.3 285.3 Dec-11

India 24.3 27.0 32.0 37.3 45.3 67.0 97.6 125.2 131.0 170.2 266.6 246.6 258.6 267.8 262.9 258.8 Jan-12

Indonesia 16.1 22.4 26.2 28.3 27.0 30.8 34.7 34.7 32.9 40.9 54.7 49.3 60.6 90.0 103.6 103.6 Dec-11

Japan 207.9 203.2 277.7 347.2 387.7 451.5 652.8 824.3 828.8 874.9 948.4 1003.7 997.0 1036.3 1221.3 1254.4 Jan-12

South Korea 19.7 52.0 73.7 95.9 102.5 120.8 154.5 198.2 210.0 238.4 261.8 200.5 265.2 286.9 298.2 298.2 Dec-11

Malaysia 20.0 24.7 29.7 27.4 28.6 32.4 42.8 64.9 69.4 81.7 100.6 90.6 92.9 102.3 129.0 129.4 Jan-12

New Zealand 4.3 3.8 4.0 3.6 3.2 4.5 5.4 6.4 8.7 13.9 17.1 10.9 14.0 15.1 15.2 15.2 Dec-11

Philippines 7.2 9.2 13.1 13.0 13.4 13.2 13.5 13.0 15.8 19.9 30.1 33.0 37.5 54.0 65.7 65.7 Dec-11

Singapore 71.0 74.6 76.5 79.7 75.2 81.6 95.5 111.8 115.7 135.8 162.5 173.6 186.0 223.9 235.7 235.7 Dec-11

Taiwan 83.5 90.3 106.2 106.7 122.2 161.7 206.6 241.7 253.3 266.1 270.3 291.7 348.2 382.0 385.5 394.4 Feb-12

Thailand 25.7 28.4 33.8 31.9 32.4 38.0 41.0 48.5 50.5 65.1 85.1 108.3 133.6 165.7 165.2 167.7 Jan-12

Latest

Source: Haver Analytics

53


March 2012

Government Debt as % of GDP

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 (f) 12 (f) 13 (f)

G3

USA 69.9 67.4 64.2 60.5 54.5 54.4 56.8 60.2 61.3 61.5 60.9 62.1 71.4 85.0 94.2 98.9 104.0 88.9

Euro area 74.1 73.6 72.5 71.8 69.2 68.1 67.9 69.1 69.6 70.2 68.5 66.3 70.1 79.7 85.3 87.7 87.5 86.9

Japan 99.5 107.5 120.5 133.3 141.7 152.9 161.4 166.0 178.0 191.1 190.0 187.6 199.9 214.9 223.4 236.5 244.0 250.8

EMEA

Czech Republic 12.4 12.2 12.2 13.7 15.4 24.9 28.2 29.8 30.1 30.4 28.2 27.0 27.6 33.4 36.5 39.2 41.1 42.4

Germany 58.7 59.1 60.5 61.4 60.2 59.1 60.7 64.3 66.4 68.6 67.9 65.1 66.7 74.5 83.4 82.0 81.0 79.5

Hungary 72.4 62.9 60.9 60.8 56.1 52.7 55.9 58.6 59.5 61.7 65.9 67.0 72.9 78.4 80.7 80.9 80.6 78.1

Italy 122.4 117.7 115.0 113.8 109.1 108.8 105.7 104.4 104.0 105.9 106.5 103.6 106.3 116.1 119.1 120.3 122.1 123.0

Poland - 42.9 38.9 39.6 36.8 37.6 42.2 47.1 45.7 47.1 47.8 45.0 47.1 50.9 55.0 57.6 57.3 57.3

Russia 56.8 56.1 145.5 98.9 62.4 50.1 41.9 32.3 24.6 15.8 8.3 6.4 5.3 7.0 7.7 8.3 9.6 10.6

South Africa 48.5 48.0 48.0 45.5 42.0 41.2 35.4 34.9 34.6 32.8 30.1 27.6 27.4 34.0 36.9 39.7 43.7 46.8

Spain 68.4 65.7 64.1 62.3 59.3 55.5 52.5 48.7 46.2 43.0 39.6 36.2 40.1 53.5 60.1 67.0 73.1 77.2

Sweden 73.3 71.2 69.9 64.3 53.9 54.7 52.5 51.7 50.3 50.4 45.0 40.2 38.8 42.7 39.7 36.4 34.9 32.6

Switzerland 23.5 25.3 27.7 25.4 25.6 24.8 27.4 27.3 27.7 28.1 25.2 23.2 22.3 20.7 20.1 20.0 20.3 20.3

Turkey - 55.6 52.3 69.2 58.0 104.4 93.0 85.1 59.2 52.3 46.1 39.4 39.5 45.4 42.8 39.0 39.0 40.2

UK 51.0 48.0 45.3 41.9 38.9 37.0 36.7 38.9 40.1 42.1 42.9 43.6 55.8 71.1 78.7 84.2 90.1 93.1

Americas

Brazil 33.3 34.3 41.7 49.4 48.8 52.6 55.5 57.2 51.7 46.5 44.0 42.8 38.5 42.1 39.2 37.0 37.8 39.5

Chile 38.3 38.3 34.5 35.1 13.8 15.1 15.7 13.0 10.7 7.3 5.3 4.1 5.2 6.2 9.2 11.1 11.6 10.7

Colombia 23.4 23.2 28.9 40.9 45.1 49.5 55.7 53.4 48.2 46.4 43.0 40.0 39.5 41.9 42.9 41.3 41.6 40.1

Mexico 38.1 31.1 33.5 30.1 10.6 11.5 22.1 22.1 20.7 20.2 20.5 20.8 24.4 28.1 27.5 28.6 27.7 27.4

Peru - - 36.7 47.3 45.5 45.9 46.7 47.1 44.3 37.7 33.0 29.7 24.2 27.2 23.4 19.9 19.2 18.4

Venezuela 55.9 38.9 36.0 35.7 31.1 32.8 42.2 52.6 38.7 32.0 23.7 24.0 20.6 27.8 43.6 44.9 46.0 47.8

Asia

Australia 52.7 48.0 46.4 41.8 35.2 32.0 30.3 28.4 27.1 22.6 19.5 11.2 11.7 21.4 27.7 27.7 30.6 29.7

Indonesia - 24.7 44.6 75.8 91.8 78.2 69.4 60.3 55.4 46.3 46.0 42.5 38.2 34.0 29.8 28.0 27.0 26.0

Malaysia - - 55.2 56.1 54.0 63.7 63.4 63.0 62.0 57.6 51.2 48.2 49.9 63.9 49.0 49.0 49.0 50.0

New Zealand 44.2 36.6 37.9 35.6 32.9 31.4 29.1 27.6 25.2 23.3 21.4 18.2 17.4 23.4 28.4 36.1 41.0 40.3

Philippines 61.3 67.0 70.2 71.5 81.5 79.9 84.7 94.5 96.3 82.2 73.3 63.1 70.0 65.3 61.9 70.0 70.0 71.0

South Korea 7.5 9.6 16.6 18.6 19.3 19.6 19.5 22.9 26.1 30.6 32.2 29.7 29.0 32.5 31.9 33.7 32.4 31.6

Taiwan 32.1 33.1 32.5 36.2 39.6 46.4 47.1 48.7 49.7 48.7 46.2 43.7 46.3 51.5 50.6 51.7 52.1 51.5

Thailand 14.5 36.3 45.2 43.2 45.3 41.1 56.0 50.5 48.0 46.4 40.4 37.5 38.2 43.9 42.4 43.0 42.8 42.7


54


March 2012

Policy Rate Forecasts

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

G3

USA 0.13 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 -0.03 0.28

Euro area 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.00 -0.28

Japan 0.05 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.05 -0.58 -0.30

EMEA

Czech Republic 0.75 0.75 0.75 0.75 0.75 1.00 1.00 1.00 1.25 0.50 0.00 0.28

Euro area 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.00 -0.28

Hungary 7.00 7.00 8.00 8.00 7.00 7.00 5.50 5.50 5.50 -1.50 4.25 4.54

Israel 2.50 2.50 2.50 2.50 3.00 3.25 3.75 4.00 4.50 2.00 1.26 1.55

Norway 1.75 1.75 1.75 1.75 1.75 1.75 2.00 2.25 2.50 0.75 1.55 1.84

Poland 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50 0.00 3.39 3.68

Russia 5.25 5.25 5.25 5.50 5.75 6.00 6.25 6.25 6.25 1.00 4.95 5.25

South Africa 5.50 5.50 5.50 5.50 6.00 6.50 7.00 7.00 7.50 2.00 5.54 5.84

Sweden 1.50 1.50 1.50 1.50 1.50 1.50 1.75 2.00 2.25 0.75 1.16 1.44

Switzerland 0.09 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -0.09 -0.64 -0.36

Turkey 7.58 10.90 11.40 9.40 8.40 8.25 8.10 7.95 7.90 0.32 7.33 7.63

UK 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.00 0.29 0.58

AMERICAS

Brazil 10.50 10.00 9.00 9.00 9.00 9.50 10.50 11.50 11.50 1.00 6.25 6.55

Canada 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.50 0.50 0.88 1.16

Chile 5.00 4.50 4.00 4.00 4.00 4.00 4.50 5.25 5.25 0.25 3.78 4.07

Colombia 5.25 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 -0.25 3.03 3.32

Mexico 4.50 4.50 4.00 4.00 4.00 4.00 4.75 4.75 4.75 0.25 3.18 3.47

Peru 4.25 4.25 4.25 4.25 4.25 4.25 4.50 4.50 4.50 0.25 0.97 1.26

USA 0.13 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 -0.03 0.28

ASIA

Australia 4.25 4.25 3.75 3.75 3.75 4.25 4.25 4.50 4.50 0.25 3.86 4.31

China 6.56 6.56 6.31 6.06 6.06 6.06 6.06 6.06 6.06 -0.50 -0.24 0.04

India* 8.50 8.00 7.50 7.00 7.00 6.75 6.50 6.50 6.50 -2.00 5.83 6.13

Indonesia 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 5.75 0.00 4.84 5.13

Japan 0.05 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.05 -0.58 -0.30

South Korea 3.25 3.25 3.25 3.25 3.25 3.50 3.75 4.00 4.00 0.75 1.72 2.01

Malaysia 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 0.00 1.61 1.90

New Zealand 2.50 2.50 2.50 2.50 3.00 3.00 3.50 4.00 4.00 1.50 2.49 2.84

Philippines 4.00 4.25 4.00 4.00 4.00 4.25 4.50 4.50 4.50 0.50 1.15 1.44

Taiwan 1.88 1.75 1.63 1.63 1.63 1.75 1.88 1.88 1.88 0.00 -1.12 -0.84

Thailand 3.00 3.00 3.00 3.00 3.50 3.50 3.50 3.50 3.50 0.50 1.68 1.97Source: GS Global ECS Research ;*Fiscal Year

1-yr Carry to EUR (%)

1-yr Carry to USD (%)

Change From Spot to Q4

2013 (%)2012 2013

Policy Rates (%, eop)

Spot

55


March 2012

Current* Forward Forecast Forward Forecast Forward Forecast 5-Yr Forecast**

G3EUR/$ 1.31 1.32 1.33 1.32 1.38 1.32 1.45 1.18EUR/JPY 106.8 106.74 102.41 106.68 104.88 106.47 107.30 128EMEAEUR/£ 0.84 0.84 0.87 0.84 0.87 0.84 0.87 0.78EUR/NOK 7.43 7.47 7.30 7.50 7.20 7.57 7.20 7.50EUR/SEK 8.92 8.95 8.80 8.98 8.70 9.05 8.60 8.38EUR/CHF 1.21 1.20 1.30 1.20 1.30 1.20 1.30 1.42EUR/CZK 24.84 24.86 25.00 24.87 25.50 24.91 24.25 22.9EUR/HUF 295.5 299.25 315.00 302.94 315.00 308.90 325.00 285EUR/PLN 4.16 4.20 4.25 4.24 4.10 4.31 4.10 3.56EUR/RUB 39.03 39.53 38.44 40.04 38.92 41.08 39.73 35.5EUR/TRY 2.34 2.39 2.33 2.44 2.48 2.53 2.68 2.67EUR/ILS 5.00 5.02 4.92 5.04 5.11 5.07 5.22 5.04EUR/ZAR 10.01 10.15 9.84 10.29 10.14 10.60 11.17 7.69Americas EUR/ARS 5.70 5.91 5.99 6.19 6.62 6.82 7.54 7.09EUR/BRL 2.33 2.37 2.26 2.41 2.35 2.48 2.54 3.19EUR/C$ 1.31 1.32 1.32 1.32 1.34 1.33 1.38 1.33EUR/MXN 16.95 17.09 16.69 17.24 17.25 17.54 17.40 14.8EUR/CLP 643.28 650.14 638.40 657.71 655.50 669.49 674.25 484EUR/PEN 3.51 3.52 3.58 3.53 3.73 3.56 3.87 3.50EUR/COP 2325.3 2348.24 2394 2364.25 2484 2402.40 2538 2522EUR/VEF 5.65 na 5.72 na 5.93 na 6.24 8.27AsiaEUR/A$ 1.24 1.26 1.23 1.27 1.28 1.30 1.34 1.39EUR/CNY 8.31 8.30 8.34 8.30 8.58 8.31 8.85 6.50EUR/HKD 10.21 10.21 10.37 10.22 10.76 10.23 11.31 9.22EUR/INR 66.18 67.58 70.49 68.58 69.97 70.24 71.05 66.2EUR/KRW 1478.4 1488.70 1530 1496.42 1490 1508.09 1508 1152EUR/MYR 3.98 4.00 3.99 4.02 4.11 4.05 4.29 3.18EUR/NZD 1.60 1.61 1.60 1.63 1.64 1.65 1.67 1.88EUR/SGD 1.65 1.66 1.65 1.66 1.68 1.66 1.74 1.36EUR/TWD 38.86 38.78 39.10 38.70 40.02 38.51 41.76 31.0EUR/THB 40.39 40.59 40.90 40.79 42.09 41.18 43.86 42.4EUR/IDR 12040 12162.16 11837 12334.67 12144 12658.08 12615 12694EUR/PHP 56.36 56.59 56.39 56.84 58.10 57.17 60.47 59.1


* Close 07 March 12

**5Yr Forecasts have been discussed in Global View point 11/08 "FX Trends During the Soft Patch".

Exchange Rate Forecasts Euro Crosses


56


March 2012

Dollar Crosses

Current* Forward Forecast Forward Forecast Forward Forecast 5-Yr Forecast**

G3EUR/$ 1.31 1.32 1.33 1.32 1.38 1.32 1.45 1.18$/JPY 81.22 81.14 77.00 81.04 76.00 80.75 74.00 108EMEA£/$ 1.57 1.57 1.53 1.57 1.59 1.57 1.67 1.51$/NOK 5.65 5.67 5.49 5.70 5.22 5.74 4.97 6.34$/SEK 6.78 6.81 6.62 6.82 6.30 6.86 5.93 7.09$/CHF 0.92 0.92 0.98 0.91 0.94 0.91 0.90 1.20$/CZK 18.89 18.90 18.80 18.89 18.48 18.89 16.72 19.4$/HUF 224.73 227.48 236.84 230.13 228.26 234.28 224.14 241$/PLN 3.16 3.19 3.20 3.22 2.97 3.27 2.83 3.01$/RUB 29.69 30.05 28.90 30.41 28.20 31.16 27.40 30.0$/TRY 1.78 1.82 1.75 1.85 1.80 1.92 1.85 2.25$/ILS 3.80 3.82 3.70 3.83 3.70 3.85 3.60 4.26$/ZAR 7.61 7.72 7.40 7.82 7.35 8.04 7.70 6.50Americas $/ARS 4.34 4.49 4.50 4.70 4.80 5.18 5.20 6.00$/BRL 1.77 1.80 1.70 1.83 1.70 1.88 1.75 2.70$/C$ 1.00 1.00 0.99 1.00 0.97 1.01 0.95 1.13$/MXN 12.89 12.99 12.55 13.09 12.50 13.30 12.00 12.5$/CLP 489 494 480 500 475 508 465 409$/PEN 2.67 2.68 2.69 2.68 2.70 2.70 2.67 2.96$/COP 1769 1785 1800 1796 1800 1822 1750 2134$/VEF 4.30 na 4.30 na 4.30 na 4.30 7.00AsiaA$/$ 1.06 1.05 1.08 1.04 1.08 1.02 1.08 0.85$/CNY 6.32 6.31 6.27 6.31 6.22 6.30 6.10 5.50$/HKD 7.76 7.76 7.80 7.76 7.80 7.76 7.80 7.80$/INR 50.34 51.37 53.00 52.10 50.70 53.27 49.00 56.0$/KRW 1124 1132 1150 1137 1080 1144 1040 975$/MYR 3.03 3.04 3.00 3.05 2.98 3.07 2.96 2.69NZ$/$ 0.82 0.81 0.83 0.81 0.84 0.80 0.87 0.63$/SGD 1.26 1.26 1.24 1.26 1.22 1.26 1.20 1.15$/TWD 29.55 29.48 29.40 29.40 29.00 29.21 28.80 26.2$/THB 30.72 30.86 30.75 30.99 30.50 31.23 30.25 35.8$/IDR 9157 9245 8900 9370 8800 9600 8700 10739$/PHP 42.87 43.02 42.40 43.18 42.10 43.36 41.70 50.0

12-Month Horizon

* Close 07 March 12

3-Month Horizon 6-Month Horizon

**5Yr Forecasts have been discussed in Global View point 11/08 "FX Trends During the Soft Patch".


57


March 2012

Asia (cont'd) Global Markets Research Jan Hatzius~ 1(212)902-0394 Japan Portfolio Strategy Research Dominic Wilson~ 1(212)902-5924Dominic Wilson~ 1(212)902-5924 Hiromi Suzuki* 81(3)6437-9955 Francesco Garzarelli~ 44(20)7774-5078

Tsumugi Akiba* 81(3)6437-9966Kazunori Tatebe# 81(3)6437-9898 Global Macro Research

Andrew Tilton~ 1(212)357-2619 Kamakshya Trivedi* 44(20)7051-4005Zach Pandl* 1(212)902-3393 Pan-Asia Strategy Derivatives Research Jose Ursua# 1(212)855-9705Alec Phillips* 1(202)637-3746 Sunil Koul# 852-2978-0924 Stacy Carlson^ 1(212)855-0684Jari Stehn* 1(212)357-6224Shuyan Wu^ 1(212)902-3053 Growth Markets Strategy Research Global Credit Strategy Research

Christopher Eoyang~ 65()6889-1199 Charles Himmelberg~ 1(917)343-3218Latin America Economics Research Jason Lui* 852-2978-6613 Kenneth Ho* 852-2978-7468Paulo Leme~ 1(305)755-1038 Lotfi Karoui* 1(917)343-1548Alberto Ramos~ 1(212)357-5768 Europe, Middle East and Africa Annie Chu# 1(212)357-5522Eduardo Cavallo* 1(212)357-5772 Peter Oppenheimer~ 44(20)7552-5782 Anthony Ip# 852()2978-2676Petya Kehayova^ 1(212)934-0199 Mortgages

European Economics Research Hui Shan# 1(212)902-4447US Portfolio Strategy Research Francesco Garzarelli~ 44(20)7774-5078David Kostin~ 1(212)902-6781 Huw Pill~ 44(20)7774-8736 FX ResearchStuart Kaiser* 1(212)357-6308 Ahmet Akarli~ 44(20)7051-1875 Robin Brooks~ 1(212)357-8763Amanda Sneider* 1(212)357-9860 Kevin Daly~ 44(20)7774-5908 Thomas Stolper~ 44(20)7774-5183Peter Lewis^ 1(212)902-9693 Clemens Grafe~ 7(495)645-4198 Themistoklis Fiotakis* 44(20)7552-2901Ben Snider^ 1(212)357-1744 Dirk Schumacher~ 49(69)7532-1210 Fiona Lake* 852-2978-6088

Andrew Benito* 44(20)7051-4004Asia Lasse Holboell Nielsen* 44(20)7774-5205 Fixed Income ResearchKathy Matsui~ 81(3)6437-9950 Magdalena Polan* 44(20)7552-5244 Silvia Ardagna* 44(20)7051-0584Timothy Moe~ 852-2978-1328 (Warsaw office) 48-22-449-2922 Constantin Burgi^ 44(20)7051-4009

Natacha Valla* 33(1)4212-1343 George Cole^ 44(20)7552-3779Asia-Pacific Economics Research Antoine Demongeot^ 44(20)7774-1169Michael Buchanan~ 852-2978-1802 Michael Hinds^ 44(20)7774-1137 Macro Equity ResearchGoohoon Kwon~ 82(2)3788-1775 Adrian Paul^ 44(20)7552-5748 Noah Weisberger~ 1(212)357-6261Tushar Poddar~ 91(22)6616-9042 Alexander Kazan* 1(917)343-4543Yu Song* 86(10)6627-3111 European Portfolio Strategy Research Aleksandar Timcenko* 1(212)357-7628Mark Tan* 65()6889-2472 Sharon Bell* 44(20)7552-1341 Camila Torrente^ 1(212)357-7621Sungsoo Chung# 82(2)3788-1726 Gerald Moser* 44(20)7774-5725Prakriti Shukla# 91(22)6616-9376 Christian Mueller-Glissmann* 44(20)7774-1714 AdministrationShirla Sum# 852-2978-6634 Anders Nielsen* 44(20)7552-3000 Linda Britten* 44(20)7774-1165Professor Song Guoqing 86(10)6627-3021 Matthieu Walterspiler# 44(20)7552-3403Yin Zhang^ 86(10)6627-3112 Editorial/Production

Commodities Research Loretta Sunnucks* 44(20)7774-3223Japan Economics Research Jeffrey Currie~ 1(212)357-6801 Julie Leavy 44(20)7552-5749Naohiko Baba~ 81(3)6437-9960 Ling Luong 44(20)7774-5676Chiwoong Lee* 81(3)6437-9984 Energy Michael Pan 852()2978-1411Yuriko Tanaka* 81(3)6437-9964 Samantha Dart* 44(20)7552-9350

Stefan Wieler* 1(212)357-7486 ECS Support Australia & New Zealand Johan Spetz 1(212)357-9225 BangaloreEconomics Research Mani D* 1(212)934-9678Tim Toohey~ 613-9679-1079 Non-Energy Ketaki Garg 1(212)934-6319Andrew Boak* 612-9321-8576 Damien Courvalin* 1(212)902-3307 Vishal Vaibhaw 1(212)934-6319Philip Borkin* 649-362-7306 Max Layton* 44(20)7774-1105David Colosimo* 613-9679-1085 Roger Yuan# 852()2978-6128 Singapore

Hui Ying Chan 65()6654-5459Asia-Pacific Portfolio Strategy Research Commodity Strategy Charles Fang 65()6654-5395Helen Zhu~ 852-2978-0048 Allison Nathan~ 1(212)357-7504 Jack Yu 65()6654-5446Kinger Lau* 852-2978-1224 David Greely~ 1(212)902-2850Caesar Maasry* 852-2978-7213 Salt Lake CityHanfeng Wang* 86(10)6627-3318 Eric Griego 1(801)884-1539Ben Bei# 852-2978-1220 Chris Henson 1(801)741-5755Richard Tang# 852-2978-0722Chenjie Liu^ 86(10)6627-3324 ~MD *VP/ED #Associate ^Research Analyst

Email: f [email protected]

Goldman Sachs Global Economics, Commodities and Strategy Research

Americas

US Economics Research

58


March 2012

Each country economist has certified as follows: I, name of economist, hereby certify that all of the views expressed in this report accurately reflect personal views, which have not been influenced by considerations of the firm's business or client relationships.

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