Goldman Sachs - Asia Interest Rate Strategy

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					November 6, 2012




Asia Interest Rate Strategy
                                                                                                     Economics Research

Asian Rates Sensitive to US and Europe Risks, But Not China

Two Risks Weighing on Asian Rates                                                  Fiona Lake
The late summer rise in Asian rates has stalled, likely reflecting concerns        +852-2978-6088 fiona.lake@gs.com
over the potential hit to growth from the US fiscal cliff and/or the potential     Goldman Sachs (Asia) L.L.C.

for further financial risks to emanate from Europe. We believe these
concerns are serving to suppress the influence of the macro backdrop
which suggests that Asian rates have the potential to continue to rise.


Macro Factors Suggest Rates Can Continue to Rise
The improvement in our GLI in October and evidence of better data out of
Asia, particularly China, indicate a more favourable macro backdrop which
points to the potential for Asian rates to continue to rise. Inflation is likely
to be past its sweet spot and most of the region’s central banks are likely to
be on hold, which also supports higher rates.


5-year Swap Rates are Mispriced
Our model for 5-year swap rates in Asia distills the key macro information
into a fair value estimate. We find that rates in most countries in the region
are below what we consider to be the ‘right price’. Rates in Korea are
particularly mispriced.


Asian Rates Most Sensitive to US and European Risks
Over the past 18 months to two years, macro fundamentals have tended to
be dominated by US and China growth risks, and risks emanating from the
European situation. Given that the market’s assessment of these risks is
not uniform at any given point in time, it is not clear which of these risks
Asian rates are most responsive to. However, we find that Asian rates are
most sensitive to European and US risk factors but are less sensitive to
China risk factors. We believe that the risks from these sources are likely to
subside in the coming months and allow Asian rates to rise to where their
fundamentals suggest they should be trading.




Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification
and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html.



The Goldman Sachs Group, Inc.                                                                                         Goldman Sachs
November 6, 2012                                                                                                    Asia Interest Rate Strategy




Overview: Fundamentals Point to a Rise in Asian Rates


                                     Late Summer Sell-off Has Stalled
                                     Asian rates rose off their recent local lows after ECB President Draghi indicated that the
                                     bank would do all in its power to save the euro “…and believe me, it will be enough” in a
                                     speech on July 26 (see exhibit 1). The sell-off lasted until September 17, since then Asian
                                     rates have reversed the move to some extent or another, as shown by the differences in
                                     the bars in Exhibit 2. 5-year swap rates in Australia have more than reversed their summer
                                     sell-off and rates in Korea and Thailand are very close to their mid July levels. Elsewhere
                                     the reversal has not been as large. China is the only rates market where 5-year swap rates
                                     are above the levels of mid September.


Exhibit 1: A Reduction in European Risks Caused a Late                 Exhibit 2: The Sell-off Has Paused Since mid-September
Summer Sell-off in Asian Rates                                         Changes in 5-year swap rates
5-year swap rates in Korea, China and Malaysia

  %                                                              %       %
 3.9                                                             3.8     0.9

                                                                 3.7     0.8
 3.7                        Mr Draghi speaks                                                                         Changes in rates 26 
                                                                         0.7
                                                                                                                     July to 17 Sept
                                                                 3.6
 3.5                                                                     0.6
                                                                                                                     Spot today less July 
                                                                 3.5     0.5                                         26
 3.3
                                                                         0.4
                                                                 3.4
 3.1                                                                     0.3
                                                                 3.3     0.2
 2.9                                                                     0.1
                                                                 3.2
                 Korea
                                                                             0
 2.7             China                                           3.1
                                                                         ‐0.1
                 Malaysia (rhs)
 2.5                                                             3.0     ‐0.2
   Jan‐12    Mar‐12      May‐12     Jul‐12     Sep‐12   Nov‐12                   KRW INR MYR TWD CNY THB HKD SGD USD AUD NZD

Source: Bloomberg; GS Global ECS Research.                             Source: Bloomberg; GS Global ECS Research.




                                     Two Sources of ‘Tail Risk’ Are Likely to be Weighing on Markets
                                     Top of Minds at the moment is likely to be the US fiscal cliff given that the US presidential
                                     election on November 6 will provide a key data point in determining the way in which this
                                     will be addressed at the end of the year. As Alec Philips pointed out in a recent US
                                     Economics Analyst, Congress is more likely to address the fiscal cliff before year end if
                                     Governor Romney wins than in a status quo election outcome. That said, under either
                                     scenario our base case – what we call the ‘not so good’ scenario- is that Congress will just
                                     barely avoid the fiscal cliff at the end of the year, though we expect additional fiscal
                                     restraint to take hold in 2013 as some provisions, like the payroll tax cut, are allowed to
                                     lapse and the fiscal cliff at the end of the year. We expect fiscal tightening of 1.1% of GDP
                                     under this base line scenario.

                                     Our US economists have outlined two other scenarios: the ‘bad’ in which US policy makers
                                     allow the upper income portions of the 2001/2003 tax cuts and the EUC to expire which
                                     would result in a fiscal tightening of 1.6% of GDP and the ‘ugly’ where the current
                                     legislation remains in place and the total fiscal tightening would amount to 3.5% of GDP.

Goldman Sachs Global Economics, Commodities and Strategy Research                                                                            2
November 6, 2012                                                                                                                                              Asia Interest Rate Strategy




                                                                        In the latest Fixed Income Monthly, Silvia Ardagna and Mariano Cena examined what these
                                                                        scenarios mean for 10-year US government bond yields. They find that the market is
                                                                        currently priced for the ‘bad’ scenario given that yields are trading roughly 70bps below
                                                                        fair value. However if the ‘ugly’ scenario transpires, 10-year yields would likely trade
                                                                        between 1.25 and 1.5%. By implication, if the ‘not-so-good’ scenario materializes, UST
                                                                        yields are likely to rise.

                                                                        Developments in Europe are also likely to be weighing on market dynamics given the
                                                                        ongoing questioning of Greece’s (and increasingly Cyprus’) future in the European
                                                                        monetary union. In addition, Spain’s request for assistance from the ESM has been delayed
                                                                        for longer than we first anticipated, but this does not appear to be troubling the market
                                                                        given that Spanish bond spreads over bunds have not risen materially and the Euro
                                                                        remains relatively firm. We continue to expect Spain to seek financial support in the
                                                                        coming weeks.

                                                                        The pause and/or retracement in the upmove in 5-year swaps in Asia likely reflects
                                                                        concerns over the potential hit to growth if either of the two less desirable outcomes for
                                                                        the US fiscal cliff materializes and/or the potential for further financial risks emanates from
                                                                        Europe. We believe these concerns are serving to suppress the influence of the macro
                                                                        backdrop which suggests that Asian rates have the potential to continue to rise.



                                                                        Global Growth Signals Continue to Look Better...
                                                                        Data released over the past month continues to suggest that global growth is improving,
                                                                        albeit from a low base. The final reading of our Global Leading Indicator (GLI) for October
                                                                        showed a further improvement in momentum and the ‘swirlogram’ remained in
                                                                        expansionary territory. Exhibit 4 shows that, post the Global Financial Crisis (GFC), the
                                                                        momentum of the GLI has corresponded with the dynamics of Asian rates. If momentum
                                                                        continues to improve, it points to higher rates in Asia. This observation is reinforced by our
                                                                        model for 5-year swaps in Asia which finds that the global cycle has a positive and
                                                                        significant impact on the region’s rates markets.


Exhibit 3: GLI ‘Swirlogram’ is in Expansionary Territory                                                        Exhibit 4: GLI Momentum has Lead Asian Rates Higher
                                                                                                                GLI momentum against 5-yr swaps in Malaysia and Thailand

                                        0.15%
                                                                              Oct-11          Nov-11              %                                                                  %
Change in GLI month-on-month momentum




                                                                                                                  4.3                                                                1.5
                                        0.10%                          Aug-12
                                                       Jul-12                   Sep-12             Dec-11         4.1
                                        0.05%
                                                                                                                  3.9                                                                1
                                                                                     Oct-12
                                                      Jun-12
                                        0.00%
                                                                                               Jan-12             3.7
                                                                                                                                                                                     0.5
                                        -0.05%        May-12                                                      3.5

                                                                                                                  3.3
                                        -0.10%             Apr-12                             Feb-12                                                                                 0
                                                                                                                  3.1
                                        -0.15%                              Mar-12
                                                                                                                  2.9                                                                ‐0.5
                                                                                                                                                 Malaysia
                                        -0.20%
                                             -0.20%    -0.10%       0.00%       0.10%         0.20%     0.30%     2.7                            Thailand
                                                         GLI month-on-month momentum                                                             GLI Momentum lagged 3 mths (rhs)
                                                                                                                  2.5                                                                ‐1
                                                                                                                     Jan‐10    Jul‐10   Jan‐11    Jul‐11     Jan‐12   Jul‐12   Jan‐13


Source: GS Global ECS Research estimates.                                                                       Source: Bloomberg; GS Global ECS Research.




Goldman Sachs Global Economics, Commodities and Strategy Research                                                                                                                         3
November 6, 2012                                                                                                          Asia Interest Rate Strategy




                                       ...Reinforced by Positive Data From China, Elsewhere in Asia
                                       The ‘top line’ growth signal from our GLI is reinforced by better individual country data.
                                       The suite of statistics released by China in October was broadly positive. Exports and retail
                                       sales were both notably stronger than Bloomberg consensus expectations, and IP and FAI
                                       were a shave higher. While at 7.4%yoy, Q3 QDP was inline with expectations and the
                                       lowest print since the GFC; sequential momentum continued to pick up, reinforcing our
                                       view that the trough in Chinese activity was in Q1 2012. Specifically, GDP has improved
                                       from 6.7% qoqann in Q1 to 7.7% qoqann in Q3.

                                       Nevertheless, the softness of the year-on-year print for GDP remains the key focus of
                                       attention and clients continue to ask when China will start to ease policy via a fiscal
                                       stimulus package, a RRR cut or interest rate cut or some combination of the three. Focus on
                                       these measures overlooks indications that China is already easing policy to support growth.
                                       The September data indicated that infrastructure FAI is continuing to rise (and this is all
                                       due to government spending), new loan growth is continuing to rise on a 12-month rolling
                                       basis. Finally, as our China Economics team has pointed out, the Chinese administration is
                                       continuing to use open market operations to manage liquidity rather than RRR or interest
                                       rate cuts. This has also coincided with a much more stable 7-day repo rate. China is likely
                                       to continue to support activity going forward in this fashion as it has done in recent months
                                       and this is one pillar of our view that Chinese activity is likely to continue to slowly pick up
                                       in the coming quarters.

                                       In the last edition of AIRS, we expressed a bias to receive rates in China, however with a
                                       rate cut now a much closer call coupled with the pick up in activity, we have shifted to a
                                       neutral stance.


Exhibit 5: Real Estate FAI Has Picked up Keeping Headline                   Exhibit 6: OMOs Have Been Used to Inject Liquidity
FAI stable



  %yoy                                                             %yoy       ppt                                                                ppt
50.0                                                                 50.0    100                                                                100
                                                                                           Contribution from NFA change
45.0                                             Headline FAI        45.0     80           Contribution from RRR changes                        80
                                                 Infrastructure                            Contribution from OMO
40.0                                                                 40.0     60                                                                60
                                                                                           Liquidity increase (net off the RRR changes, yoy%)
35.0                                             Real estate         35.0
                                                                              40                                                                40
30.0                                                                 30.0
                                                                              20                                                                20
25.0                                                                 25.0
                                                                                0                                                               0
20.0                                                                 20.0
                                                                             -20                                                                -20
15.0                                                                 15.0
                                                                             -40                                                                -40
10.0                                                                 10.0

  5.0                                                                5.0     -60                                                                -60

  0.0                                                                0.0     -80                                                                -80
    Jan-10     Jul-10    Jan-11        Jul-11   Jan-12    Jul-12                    06     07      08       09       10       11       12

Source: CEIC; GS Global ECS Research                                        Source: CEIC; GS Global ECS Research




                                       Better global growth has translated into better export performance in North Asia – China,
                                       Korea and Taiwan - and indeed the latter two countries have also seen a recovery in their
                                       exports to China. The momentum of industrial production has picked up in Taiwan and
                                       China, but the data from Korea only shows a very tentative recovery. ASEAN export
                                       performance has been comparatively weak. The detailed data for Malaysia and the

Goldman Sachs Global Economics, Commodities and Strategy Research                                                                                     4
November 6, 2012                                                                                           Asia Interest Rate Strategy




                                  Philippines suggests that the weakness is commodity related and manufacturing exports
                                  are holding up well. In fact, in Malaysia, manufacturing exports have been stronger than
                                  elsewhere in Asia in recent months. Where data has been released for September, there
                                  are signs that the weakness in ASEAN exports is starting to reverse.

                                  Broad weakness in ASEAN exports has been offset by strong domestic demand according
                                  to the GDP data. Judging by the, albeit limited, monthly indicators, domestic demand has
                                  remained firm in this part of Asia. Thailand’s monthly composite private consumption
                                  index continues to run above 4% yoy and private sector investment indicators remain very
                                  strong. Car sales remain strong in the Philippines. Indonesia has published Q3 GDP and the
                                  details showed that consumption rose by 5.7% yoy, one of the strongest consumption
                                  prints ever.


                                  Inflation Past its Sweet Spot, but not Uncomfortable for Most
                                  Central Banks
                                  Inflationary pressures are within central bank’s comfort zones in most parts of Asia as
                                  shown in Exhibit 7. However, three countries continue to stand out - India, Singapore and
                                  Taiwan. India WPI continues to hover slightly higher than 7.5% as has been the case for
                                  most of this calendar year and core WPI has picked up by close to 100bps to 5.7% since the
                                  trough in March. We now expect WPI to rise to 8.5% by December and to soften thereafter.
                                  Headline CPI in Singapore rose to 4.7% in September and helps explain why the MAS
                                  choose to keep policy unchanged in October against market expectations of a reduction in
                                  the slope of the SGD NEER. Taiwan CPI rose to well above 2% in the four months to
                                  October, a relatively high print for Taiwan, mainly on the back of a rise in local food prices.

                                  Relatively muted price pressures elsewhere in the region are likely to reflect both
                                  favourable base effects and the recent sluggish patch of growth which is keeping capacity
                                  constraints at bay. However, we do expect inflationary pressures to pick up somewhat
                                  going forward as these influences reverse. Our forecasts are detailed in Exhibit 7. While we
                                  do expect inflation to pick up, we do not expect it to push above the central banks’ comfort
                                  zones and we expect inflation in Singapore to soften into the MAS’s forecast range. India is
                                  the only country where we expect inflation to be an issue for the central bank. In our view,
                                  inflation will only soften to 8.1% by March, 60bps above the RBI’s forecast for the same
                                  point in time. Somewhat higher inflation argues for higher rates, or at minimum is likely to
                                  put a floor under 5-year swap rates.




Goldman Sachs Global Economics, Commodities and Strategy Research                                                                   5
November 6, 2012                                                                                               Asia Interest Rate Strategy




                                  Exhibit 7: Inflation Has Likely Troughed in Korea and ASEAN

                                                                                             Central bank
                                                   Latest     GS Forecasts                  target/forecast
                                                  Inflation       Q4
                                   %                Print   2012 2012 2013                      for 2012
                                   Korea             2.1        2.4       2.6      2.8         2.5%-3.5%
                                   India*            7.8        7.2       8.5      5.7    7.5% by Mar 2013
                                   China             1.9        2.8       2.4      3.0             4%
                                   Malaysia          1.3        1.8       1.9      2.8          2.5-3.0%
                                   Philippines       3.6        3.4       3.8      4.2          4%+/-1%
                                   Indonesia         4.6        4.5       5.3      5.7          3.5-5.5%
                                   Thailand*         1.8        2.7       3.5      4.3           0.5-3%
                                   Taiwan            3.0        1.2       1.0      1.7           1.93%
                                   Singapore         4.7        4.3       3.5      3.4        3.5% - 4.5%
                                   * India WPI for FY; Thailand core inflation

                                  Source: Bloomberg; Relevant authorities; GS Global ECS Research estimates.




                                  We do not Expect Most Central Banks to Ease Further
                                  Arguably another issue weighing on the region’s rates markets alongside the tail risks
                                  associated with the European situation and the US fiscal cliff, has been whether or not
                                  Asian central banks would ease policy. This question was first raised after the Bank of
                                  Korea’s (BoK) surprise 25bps cut in July, which was followed up by more dovish surprises
                                  from Bank of Thailand (BoT) and Bangko Sentral ng Pilipinas (BSP). (BoK cut rates by a
                                  further 25bps in October, which was in line with our expectations and those of the market)

                                  The table below updates the ‘room to ease’ framework we introduced in a recent Asia
                                  Economics Analyst. This simply looks at the latest GDP print, latest CAI print and our GDP
                                  forecast for 2012 against where we consider trend growth to be. A bold figure indicates
                                  that the relevant figure is below trend. We also stack up the latest CPI print and our forecast
                                  for 2012 against each central bank’s target or forecast. A figure in bold indicates that the
                                  data is below central banks’ forecast/target. If growth is below trend and inflation below the
                                  central banks target/forecast, we judge that the central bank has ‘room to ease’ in the
                                  current uncertain environment.




Goldman Sachs Global Economics, Commodities and Strategy Research                                                                       6
November 6, 2012                                                                                                                    Asia Interest Rate Strategy




                                  Exhibit 8: Room to Ease: Korea, Philippines Have Had Room to Ease, India does not


                                                                       GDP                                                     CPI
                                                                       2012                                                   2012
                                                       CAI %qoq       Year (f)      Trend          spot        year (f)            CB target/forecast
                                   China                   8.0          7.6           8.0           1.9          2.8                        4.0
                                   India*                  7.8          5.7           7.6           7.8          7.9            WPI at 6.5% March 2013
                                   Indonesia               5.9          6.0           6.0           4.6          4.5             HCPI between 3.5-5.5%
                                   Korea                  -0.2          2.6           3.8           2.1          2.4                HCPI at 2.5-3.5%
                                   Malaysia                1.5          4.6           5.0           1.3          1.8            HCPI at 2.5-3% for 2012
                                   Philippines             1.7          4.9           5.0           3.6          3.4               HCPI between 3-5%
                                   Singapore              -2.5          2.0           5.0           4.7          4.3        HCPI between 3.5-4.5% in 2012
                                                                                                                             Target: M2 growth at 2.5-6.5%.
                                   Taiwan                  0.1          3.0           4.5           2.4          1.2
                                                                                                                              Inflation forecast 1.93% 2012
                                   Thailand*               5.6          5.7           4.5           1.8          2.7              CCPI between 0.5-3%
                                   * WPI for Indian; Core CPI for Thailand

                                  We identify whether a central bank has ‘room to ease’ in an uncertain environment by comparing indicators of activity to
                                  trend growth and inflation to central bank’s targets/forecast. A figure in bold indicates either below trend growth or soft
                                  inflation both of which are signals for a central bank’s room to ease.

                                  Source: Haver Analytics; Relevant Authorities; GS Global ECS Research estimates.




                                  The table highlights that the data provides BoK, BSP and Bank Negara Malaysia (BNM)
                                  ‘room to ease’. However, given that both BoK and BSP have both already cut rates by
                                  50bps in recent months, the data likely has to get materially worse for either bank to ease
                                  further. The table does raise a warning flag that BNM could ease policy as well, which
                                  would be counter to our current expectations. Arguably BNM Governor Zeti has made a
                                  very slightly dovish shift in her latest commentary by seeming to focus a bit more on weak
                                  external demand and sounding more cautious on global growth than what has been the
                                  case in the past. The governor also stated that there was no change in BNM’s range of
                                  economic growth projections, thus if indeed BNM has made a tiny dovish shift, rate cuts do
                                  not appear to be imminent.

                                  The table also suggests that BoT does not have room to ease despite the surprise cut at its
                                  October meeting, which was delivered on the back of concerns about domestic growth and
                                  export performance. This reinforces our Thailand economist Mark Tan’s argument that the
                                  surprise 25bp cut was more about stemming hot money flows into Thailand and therefore
                                  THB appreciation, than a need to ease policy to boost growth.

                                  Ongoing sticky inflation in India and Singapore underscores why both central banks kept
                                  rates on hold at their October meetings despite market expectations of easier policy. Given
                                  that the table in Exhibit 8 suggests that from a growth perspective, policy could be eased,
                                  we believe inflation concerns are of the highest priority in both places.

                                  We expect monetary policy in most parts of the region to remain on hold in the months to
                                  come and start to reverse the current degree of policy accommodation in the middle part of
                                  2013. We do expect interest rates to be cut in India, and policy accommodation in China is
                                  likely to come through other channels. Exhibit 9 provides our forecasts for 3-month rates
                                  against the current market forwards. We are more hawkish than the market on rates in
                                  Korea and less dovish in India.




Goldman Sachs Global Economics, Commodities and Strategy Research                                                                                               7
November 6, 2012                                                                                                      Asia Interest Rate Strategy




                                  Exhibit 9: Our Forecasts for Korea and India are More Hawkish than the Market
                                  GS Forecasts for 3 month rates against market forward rates

                                                                       3-months                 6-months                  12-months
                                                     Current*      Forward Forecast         Forward Forecast           Forward Forecast
                                   India               8.1           7.6      8.1             7.2      7.6               7.0      7.4
                                   South Korea         2.8           2.8      2.9             2.7      2.9               2.7      3.1
                                   Malaysia            3.2           3.2      3.3             3.3      3.3               3.1      3.3
                                   Taiwan              0.9           0.9      0.9             1.0      0.9               0.9      1.0
                                   Thailand            2.9           3.1      2.9             3.1      2.9               2.7      2.9
                                   Close 01 November 12, mid-rates for major markets. We are currently using Dec 2012, Mar 2013 and Sep 2013
                                   contracts for 3-mth forward rates.

                                  Source: Bloomberg; GS Global ECS Research estimates.




                                  Outlook is for Major Market Rates to Rise
                                  A final factor in our thought process on the outlook for Asian rates is our view of the likely
                                  developments in G10 fixed income. In the recent edition of the Fixed Income Monthly,
                                  Francesco Garzarelli and team outlined why they expect G10 rates to rise over the next 3 to
                                  6 months. They highlight central bank policy from the Fed, ECB and BoE and more recently
                                  the BoJ designed to open credit channels, signs that TARGET 2 imbalances could be on the
                                  cusp of turning which would reallocate capital from core Euro area into the periphery and
                                  signs of better global growth. All of which are likely to push 10-year yields towards where
                                  we estimate fair value to be. For instance, we find the “right price” for 10-year USTs to be
                                  2.5%. Given the co-movement between US rates and Asian rates, a rise in US yields is
                                  likely to be a factor in pushing Asian rates higher.



                                  5-Year Swap Rates Still Below Fair Value in Most Places
                                  Much of the discussion presented in this piece can be distilled by our fair value model for
                                  5-year swap rates. As a reminder, our model includes year-ahead consensus expectations
                                  of 3-month rates, GDP and inflation as well as expectations of the global cycle to provide
                                  an estimate as to where 5-year swap rates should be trading for a given set of macro
                                  fundamentals. 5-year swaps in Korea are the most misaligned with their fundamentals with
                                  spot. We find rates elsewhere to be more than one standard deviation away from fair value.
                                  India is the only 5-year swap market which reflects its fundamentals.




Goldman Sachs Global Economics, Commodities and Strategy Research                                                                              8
November 6, 2012                                                                                                                Asia Interest Rate Strategy




                                  Exhibit 10: Asian 5-year Swap Rates Are Below Fair Value in Most Places

                                                                                                                                            Fair value
                                                                                Misvaluation against
                                                                                                                     Fair value            change until
                                                                                  fair value in s.e.
                                                                                                                                             Dec-12
                                            %                    Actual*           CE              GS             CE**         GS***          GS***
                                   India                          7.10             0.53            0.40           6.83         6.89           -0.30
                                   Korea                          2.80            -2.27           -3.05           3.63         3.91            0.14
                                   Malaysia                       3.22            -1.17           -1.37           3.58         3.65            0.04
                                   Thailand                       3.00            -0.68           -0.20           3.35         3.10            0.29
                                   Taiwan                         0.98            -0.69           -0.41           1.17         1.09           -0.05
                                   Hong Kong                      0.69            -1.78           -1.68           1.88         1.82            0.03
                                   Singapore                      0.91            -0.87           -0.60           1.25         1.15            0.11
                                  Source: Consensus Economics, GS Global ECS Research; We have used onshore swap rates in our modelling work; * Close of
                                  5 Nov 2012, ** Consensus Economics, Latest Edition, *** GS Economic Research inputs; Details on the Model can be found in
                                  the Asian Interest Rate Strategy July, 2012


                                  Source: Consensus Economics, GS Global ECS Research estimates.




                                  We Continue to Hold a Bias to Pay Rates
                                  Indications of better global and regional growth, the likely trough in inflation, the potential
                                  for major market rates to move higher maintains our bias to pay rates in Asia. At the front
                                  end of the curve, our policy views are more hawkish than the market in India and
                                  particularly Korea. At the longer end of the curve, our modeling indicates that 5-year swap
                                  rates in most markets are too low, but that rates in Korea are the most mispriced. This
                                  would still be the case if we assume that BoK does not hike rates by 50bps which is our
                                  baseline scenario. Thus our focus remains on opportunities to pay rates in Korea.




Goldman Sachs Global Economics, Commodities and Strategy Research                                                                                             9
November 6, 2012                                                                                                                                                      Asia Interest Rate Strategy




Asian Rates are Sensitive to US and European Risks

                                                           Three Disks Dominating Macro Drivers
                                                           Evidence of a pick up in global growth warrants higher swap rates in Asia in our view,
                                                           alongside a gentle rise in inflationary pressures and central banks which are likely to be on
                                                           hold in the coming months rather than easing further. Indeed this path started to
                                                           materialize in late July as Asian rates started to sell off, but since the middle of September,
                                                           rates have either stalled or in some places substantially reversed. The dynamics in Asian
                                                           rates markets have been driven by changing assessments of the risks from three different
                                                           sources: US growth, China growth and the European sovereign situation. Indeed, for the
                                                           past 18 months to 2 years, we would argue that macro fundamentals as dictated by year-
                                                           ahead consensus economics expectations (or our own forecasts) have often played second
                                                           fiddle to these three risk factors in driving Asian rates dynamics and the same is true
                                                           across the broader asset spectrum.



                                                           Asia’s Exposure to the Three Risks
                                                           Given that Asia is characterized by small open economies, the macro impact of these three
                                                           risks could have a material impact on the region’s export performance. The charts below
                                                           provide an indication of Asia’s external exposure to these three risks through total exports
                                                           as a percentage of GDP and more granularly, exports to the US, Euro area and China as a
                                                           percentage of GDP. Thailand Malaysia, Korea and Taiwan all have a notable proportion of
                                                           exports as a percentage of GDP – they are the most open economies in the region. India is
                                                           the least exposed to the global cycle on this measure. Exports to China make up a higher
                                                           proportion of GDP than exports to the US and Euro area. However only 40-60% of Asia’s
                                                           exports to China are for Chinese consumption, the rest of the exports to China are for the
                                                           production of final goods for re-export. Taking into consideration Asian exports to China to
                                                           satisfy Chinese demand, these macro exposures suggest that Asian rates should be slightly
                                                           more sensitive to China growth risks than US or European risk factors.


Exhibit 11: Asia’s Exposure to Global Activity                                                    Exhibit 12: Asia’s Exposure to the Three Risks
Total exports as percentage of GDP over the last 12 months                                        Exports to China, US and Euro area as a percentage of GDP
                                                                                                  (over the last 12 months)

  % GDP                                                                                             % GDP
 90                                                                                                20.0
                                                                                                                                to US
 80                                                                                                18.0
                                                                                                                              to China
                        Total exports                                                              16.0
 70                                                                                                                           to Euro area
                                                                                                   14.0                       Exports to China  for China
 60
                                                                                                   12.0
 50
                                                                                                   10.0
 40
                                                                                                    8.0
 30
                                                                                                    6.0
 20                                                                                                 4.0
 10                                                                                                 2.0

  0                                                                                                 0.0
                                                                                                                                                                                           Taiwan
                                                                                                                                                Thailand


                                                                                                                                                           Malaysia
                                                                                                                                        India




                                                                                                                                                                                   Korea
                                                                                         Taiwan




                                                                                                             Philippines




                                                                                                                                                                           China
                                                                                                                           Indonesia
                                                Thailand


                                                              Malaysia
          Philippines


                            Indonesia




                                                                         China
                                        India




                                                                                 Korea




Source: Haver Analytics; GS Global ECS Research.                                                  Source: Haver Analytics; GS Global ECS Research estimates.




Goldman Sachs Global Economics, Commodities and Strategy Research                                                                                                                                   10
November 6, 2012                                                                                                              Asia Interest Rate Strategy




                                  It is not just the exposures that matter. We also need to contemplate the performance of
                                  Asian exports to US, China and Euro area. Asian exports peaked in the first quarter of 2011
                                  and have basically stalled since. Over this period, Asian exports to the Euro area have
                                  deteriorated by far more than exports to the US or China. Asia’s export exposure and
                                  export performance provide mixed signals as to the potential sensitivity of Asian rates to
                                  the three risks.


                                  Exhibit 13: Asian exports to the Euro area have underperformed compared to elsewhere
                                  Asia’s export performance to Euro area, US and China, Q1 2011 to date.

                                     % 
                                    50
                                    40
                                    30
                                    20
                                    10
                                     0
                                   ‐10
                                   ‐20
                                   ‐30               US

                                   ‐40               China

                                   ‐50               Eurozone
                                   ‐60


                                                                                                       Taiwan
                                                                                            Thailand
                                                                                 Malaysia
                                                             India
                                             Korea




                                                                     Indonesia




                                                                                                                Philippines
                                  Source: Haver Analytics; GS Global ECS Research.




                                  The Three Risk Framework
                                  In order to disentangle the sensitivity of Asian rates to each risk factor, we have used the
                                  framework laid out in a recent Global Economics Weekly. Each risk is the first principal
                                  component of a set of assets that we believe are most sensitive to that specific risk.

                                            The US growth factor is extracted from the common elements of the US 10-year
                                             yield, the GS Wave-front Consumer Growth basket and the trade-weighted
                                             Canadian Dollar.

                                            The China growth factor is extracted from the ratio of the Chinese H-share market
                                             to the S&P 500, 3-month copper futures and the 12-month forward points of the
                                             CNY which show the appreciation or depreciation priced in the NDF market over
                                             the following year.

                                            The European risk factor is derived from the common elements of an index of
                                             Euro-area sovereign CDS, iTraxx senior financial 5-year CDS, an index of European
                                             bank equity and the cross-currency basis for the EUR/$.



                                  The Market’s Assessment of the Three Risks Differs Over Time
                                  Exhibit 14 shows how these risks have evolved over the last 12 months. There are periods
                                  of co-movement - it is often the case that when the market is concerned about one risk, it


Goldman Sachs Global Economics, Commodities and Strategy Research                                                                                     11
November 6, 2012                                                                                                                 Asia Interest Rate Strategy




                                  also is concerned about the other risks. The period between April 2012 and June 2012
                                  witnessed worries over the fiscal consolidation plans in Spain and Italy alongside
                                  deteriorating data in the US and China. However, it is also the case that when the risks of
                                  one factor diminish, the risks around all three diminish as was the case from late December
                                  2011 to the middle of Q1 2012 helped by the ECB’s LTROs and better global data.

                                  Over other periods, the risk factors move in different directions which highlights the need
                                  to explore which risk Asian rates are most sensitive to. From mid-July 2012 to mid-
                                  September 2012, there were signs of a pick up of domestic activity in the US and ECB
                                  President Draghi significantly reduced the European tail risk in a speech on July 26 when
                                  he indicated that the bank stood ready to do all it takes to save the euro. This was
                                  subsequently followed up with the announcement of the OMT program in September. At
                                  the same time, the market began to shift its concerns to downside risks to Chinese growth;
                                  consequently the US and European risk factors improved while the Chinese growth factor
                                  stagnated and even declined somewhat. In the period since September 2012, Chinese and
                                  European risks have improved on the back of better data from China and the ongoing
                                  influence of the OMT announcement, but the US risk factor has deteriorated, largely
                                  reflecting worries over the US fiscal cliff.




                                  Exhibit 14: The Market’s Perception of Risks From the US, Euro Area and China Differ
                                  Overtime
                                  The evolution of the three risk factors defined in the text

                                  115
                                        Index (start-                                                        Europe
                                          Oct=100                                                            China
                                                                                                             USA
                                  110



                                  105



                                  100



                                   95                                  China Risk
                                           European        All Three                 All Three        China Risk
                                           Risk Worsens                Worsens                        Worsens
                                                           Risks                     Risks
                                           while Others                while Other                    again
                                                           Upgraded                  Downgraded
                                           Improve                     Improve
                                   90
                                   Oct-2011               Jan-2012            Apr-2012            Jul-2012            Oct-2012

                                  Source: GS Global ECS Research.




Goldman Sachs Global Economics, Commodities and Strategy Research                                                                                        12
November 6, 2012                                                                                           Asia Interest Rate Strategy




                                  Assessing the Sensitivity of Asian Rates to the Three Risks
                                  In order to assess the sensitivity of 5-year swap rates in Asia to the three risks we run
                                  regressions of the weekly change in swap rates from January 2010 to October 2012 on the
                                  first order difference of the logarithm of each of the three risks and a constant. For instance,
                                  for Korea the equation is specified as follows:
                                          Δt      5         0
                                                                    Δ log
                                                                  1 t
                                                                                           β2 Δt log
                                                                β3 Δt log
                                  Expressing the dependent variables as the first order difference of logarithms allows us to
                                  interpret the coefficients as the change in swap rate caused by a percentage change in each
                                  of the risk factors. The sensitivity of Asian Swap rates to the three risks is summarized by
                                  the relative magnitude of the t-statistics on each of the three factors. We find that Asian
                                  rates are far more sensitive to US growth risks than risks stemming from either China or
                                  Europe.

                                  However, the sensitivity of Asian rates to the US risk factor is potentially overstated given
                                  that the latter includes UST yields which tend to have a high correlation with Asian fixed
                                  income. In addition, the level of US yields is also likely to have been influenced by the
                                  European situation, making it a challenge to disentangle the effects of US and European
                                  risks on Asian rates. Strong demand for safe assets, as a result of the European situation,
                                  has likely suppressed UST yields below were we consider the fair value to be.

                                  In order to try and circumnavigate this issue, we repeat the analysis, but replace the US
                                  growth risk factor with the Goldman Sachs Wave-Front US consumer growth basket to
                                  proxy for US growth risks. These results (see Exhibits 15-16) find that Asian rates are less
                                  sensitive to US risks and more sensitive to Euro area risks compared to the first set of
                                  results. (We find them to be marginally more sensitive to US risks than Euro area risks).
                                  The sensitivity of Asian rates to China risks remains low. It is interesting to note that China
                                  rates are more sensitive to US and European risks than China risks. 5-year swaps in China
                                  have the highest sensitivity to China risks followed by Taiwan.

                                  The second set of results dovetails with our recent work in which we tried to explain why 5-
                                  year swaps in Asia has been trading persistently below where we consider fair value to be.
                                  When we included the European risk factor in our model for 5-year swaps, we found that it
                                  helped explain much of the misevaluation in recent months. However, when we also
                                  accounted China risk, we did not find it to be significant. (We should note that US growth is
                                  already accounted for in the model as part of the global variable).




Goldman Sachs Global Economics, Commodities and Strategy Research                                                                  13
November 6, 2012                                                                                                                                   Asia Interest Rate Strategy




Exhibit 15: Asia 5-year Swap Rate Sensitivities: US vs.                                 Exhibit 16: Asia 5-year Swap Rate Sensitivities: US vs
China                                                                                   Europe
Using GS Wavefront Consumer Growth Basket                                               Using GS Wavefront Consumer Growth Basket
A t-stat of over 1.96 in absolute terms indicates significance                          A t-stat of over 1.96 in absolute terms indicates significance
of the risk factor at a 5% level                                                        of the risk factor at a 5% level

                         6                                                                                       4

                         5
                                                                                                                 3
                         4
                                                                                                                 2
                         3                                                                                                     cny
 China Factor (t-stat)




                                                                                         China Factor (t-stat)
                                                                                                                                           twd
                                                                                                                 1
                         2
                                                                       cny                                                                               inr
                         1                                   twd                                                 0
                                                                inr                                                                                thb         krw
                         0
                                                                                                                 -1
                                                 thb
                         -1                                  krw                                                                         hkd                         myr
                                                                   myr
                                                       hkd                                                       -2
                         -2
                                                                                                                 -3                                            sgd
                         -3                     sgd
                                       USA Consumer (t-stat)                                                                                         Europe Risk Factor
                         -4                                                                                      -4
                              -2   0         2                     4         6                                        -1   0         1         2                 3         4

Source: GS Global ECS Research.                                                         Source: GS Global ECS Research.



                                             Asian Rates More Sensitive to US and Euro area risks
                                             Our analysis finds that Asian rates are more sensitive to US and Euro area growth risks
                                             than they are to China growth risks. If risks from the former two sources diminish, Asian
                                             rates are likely to be able to rise to levels which better reflect their macro fundamentals. An
                                             increase in risks from the US and Europe are likely to keep rates suppressed below where
                                             we consider fair value to be or indeed push rates even lower.

                                             Given that developments in these risks factors have a notable political element, forecasting
                                             where next is challenging. However, our base case scenario for each is for an improvement
                                             in risk sentiment.

                                                             US Risk: Our base case is that the US economy will not fall off the fiscal cliff and
                                                              while concerns related to this issue are likely to suppress growth in Q1 2013 to
                                                              only 1.5% qoqann, we expect growth to pick up in subsequent quarters.

                                                             European Risk: Uncertainty remains over the next tranche of funding for Greece, a
                                                              bailout for Cyprus and Spain’s request for help. We expect these issues to be
                                                              resolved in the coming weeks and continued policy progress on a banking union
                                                              through 2013 in the single currency area is likely to reduce tail risks further. We
                                                              also expect Euro area activity to improve somewhat through end of 2013 from a
                                                              contraction of 0.8% yoy in Q3 2012 to slight growth of 0.8% yoy by the end of 2013.

                                                             China Risk: Recent data has indicated that Chinese activity is slowly picking up and
                                                              the transition of power on November 8 is likely to reduce any political uncertainty.

                                             As the immediate risks from US and Europe recede early next year and growth continues
                                             to show some improvement, the market is likely to re-price its view of risks from these
                                             sources in a positive fashion and that should help to lift Asian rates towards their
                                             fundamental fair value.

                                             Fiona Lake and Jonathan Sequeira*

                                             Jonathan Sequeira is an intern with the Global Markets team.




Goldman Sachs Global Economics, Commodities and Strategy Research                                                                                                              14
November 6, 2012                                                                                                                       Asia Interest Rate Strategy




Asian Swap Rate Model

5-year swap rates: fitted vs. Actual

                                                                                                                               Fair value
                                                                  Misvaluation against
                                                                                                        Fair value            change until
                                                                    fair value in s.e.
                                                                                                                                Dec-12
                            %                      Actual*            CE               GS             CE**        GS***          GS***
                   India                            7.10              0.53             0.40           6.83        6.89           -0.30
                   Korea                            2.80             -2.27            -3.05           3.63        3.91            0.14
                   Malaysia                         3.22             -1.17            -1.37           3.58        3.65            0.04
                   Thailand                         3.00             -0.68            -0.20           3.35        3.10            0.29
                   Taiwan                           0.98             -0.69            -0.41           1.17        1.09           -0.05
                   Hong Kong                        0.69             -1.78            -1.68           1.88        1.82            0.03
                   Singapore                        0.91             -0.87            -0.60           1.25        1.15            0.11
                   Source: Consensus Economics, GS Global ECS Research; We have used onshore swap rates in our modelling work; * Close of
                   5 Nov 2012, ** Consensus Economics, Latest Edition, *** GS Economic Research inputs; Details on the Model can be found in
                   the Asian Interest Rate Strategy July, 2012


Source: Consensus Economics, GS Global ECS Research estimates; We have used onshore swap rates in our modelling work; * Close of 2 November 2012, **
Consensus Economics, Latest Edition, *** GS Economic Research inputs; Details on the Model can be found in the Asian Interest Rate Strategy July, 2012




                            Long-term charts of the fitted vs. actual value can be found on the next page.


Sudoku Model
10-year Bond Yields: Market vs. GS Sudoku Model*, Spot and 3 Months into Future


                                                                                                                            change (due to 
                                                    Misvaluation against fair                                                  change in 
                                                     value ***, Standard                                                    fundamentals), 
                                       Actual** (%)        deviations                          Fair value ***, %                 t+3m
                                                        CE            GS                       CE            GS                   GS
                          USA               1.71              -1.7             -1.8            2.52            2.58                0.01
                       Germany              1.44              -0.9             -1.1            1.96            2.09                0.01
                         Japan              0.78              -0.5             -0.7            0.99            1.07                0.00
                          UK                1.83              -0.7             -0.8            2.43            2.48                0.01
                        Canada              1.79              -1.2             -1.3            2.73            2.79                0.06
                       Australia            3.18              -1.2             -1.3            4.17            4.21                0.03
                     Switzerland            0.48              -1.5             -1.5            1.21            1.23                0.01
                        Sweden              1.46              -0.4             -0.5            1.91            1.99                0.01
                   * Details in Chapter 12 of The Foreign Exchange Market (2006), Global Viewpoint 07/24 and Global Viewpoint 08/04. **Last
                   close.
                   ***CE stands for Consensus Economics inputs of macroeconomic fundamentals (latest available month), GS stands for GS
                   Economic Research inputs (current month).


Source: Consensus Economics, GS Global ECS Research estimates.




Goldman Sachs Global Economics, Commodities and Strategy Research                                                                                              15
November 6, 2012                                                                                                      Asia Interest Rate Strategy




Asian Swap Rate Model

Korea 5-year Swaps: Actual vs. Fitted                               India 5-year Swaps: Actual vs. Fitted

 6.5                                                                 10.5
        %
 6.0                                                                  9.5        %

 5.5                                                                  8.5

 5.0                                                                  7.5

 4.5                                                                  6.5

 4.0                                                                  5.5
                                   +/- 2 S.E.                                                            +/- 2 S.E.
 3.5                                                                  4.5
 3.0                Actual                                            3.5                 Actual
                    Fitted                                                                Fitted
 2.5                                                                  2.5
       03      04    05      06     07    08    09   10   11   12           03       04      05    06      07    08   09    10     11     12




Malaysia 5-year Swaps: Actual vs. Fitted                            Thailand 5-year Swaps: Actual vs. Fitted

 6.0                                                                 8.0

 5.5                                                                 7.0        %
        %
 5.0                                                                 6.0

 4.5                                                                 5.0

 4.0                                                                 4.0

 3.5                                                                 3.0
                                   +/- 2 S.E.                                                           +/- 2 S.E.
 3.0                                                                 2.0

 2.5                Actual                                           1.0                  Actual
                    Fitted                                                                Fitted
 2.0                                                                 0.0
       03      04    05      06     07    08    09   10   11   12          03        04     05     06     07    08    09    10     11    12




Taiwan 5-year Swaps: Actual vs. Fitted                              Singapore 5-year Swaps: Actual vs. Fitted

 4.0                                                                 5.0
        %
 3.5                                                                 4.5
                                                                            %
                                                                     4.0
 3.0
                                                                     3.5
 2.5
                                                                     3.0
 2.0
                                                                     2.5
 1.5                                                                 2.0
                                  +/- 2 S.E.
 1.0                                                                 1.5                                +/- 2 S.E.
                    Actual
                                                                     1.0
 0.5                Fitted                                                                Actual
                                                                     0.5
 0.0                                                                                      Fitted
       03      04    05      06     07    08    09   10   11   12    0.0
                                                                           03        04     05     06     07    08    09    10     11    12




            Source: Bloomberg; GS Global ECS Research estimates.

Goldman Sachs Global Economics, Commodities and Strategy Research                                                                              16
November 6, 2012                                                                                                                     Asia Interest Rate Strategy




Growth and Inflation Outlook


GDP Growth: GS vs. Consensus

                                                                          2012                            2013                Trend
                                 % yoy                2011
                                                                   GS           Consensus*        GS          Consensus*     GS Est.
                       USA                             1.8          2.2             2.1           1.9            2.0           2.5
                       Japan                          -0.8          1.7             2.3           0.5            1.3           1.0
                       Euro area                      1.5          -0.5            -0.5           0.1            0.2           1.5
                       UK                             0.8          0.1             -0.2           1.9            1.2           2.8
                       Australia                       2.1          3.5             3.4           2.6            2.9           3.3
                       New Zealand                    1.3          2.5             2.4            2.7            2.7           2.3
                       China                           9.3          7.6             7.7           8.0            8.1           8.0
                       India                           6.5          5.7             5.8           7.0            6.8           7.6
                       Hong Kong                      5.1          3.5              1.6           5.2            3.6           5.0
                       Taiwan                          4.0          3.0             1.5           4.5            3.6           4.5
                       South Korea                     3.6          2.6             2.5           3.5            3.3           3.8
                       Singapore                       4.9         2.0              2.0           4.0            3.6           5.0
                       Malaysia                        5.1          4.6             4.9           5.3            4.7           5.0
                       Thailand                        0.1          5.7             5.4           4.8            4.4           4.5
                       Indonesia                       6.5          6.0             6.1           6.4            6.0           6.0
                       Philippines                    3.9          4.9              5.3           5.3            5.1           5.0
                       BRICs                          7.4          6.1              6.2           6.9            6.8            -
                       Advanced                        1.6          1.3             1.3           1.5            1.5            -
                       World                           3.8          3.1             3.1           3.5            3.5           4.0
                       * Consensus Economics October 2012.                  Source: GS Global ECS Research;


Source: Consensus Economics, GS Global ECS Research estimates.




Inflation: GS vs. Consensus

                                                                   2012                         2013
                            % yoy             2011                                                                policy target/ forecasts
                                                             GS     Consensus*            GS     Consensus*
                   USA                         3.1           2.2          2.1             2.2           2.0         Core PCE at 2%*
                   Japan                       -0.3          0.0          0.0             0.1          -0.1         HCPI around 1%*
                   Euro area                   2.7           2.5          2.4             2.2           1.9        HCPI just below 2%*
                   UK                          4.5           2.7          2.7             2.0           2.1            HCPI at 2%
                   Australia                   3.3           1.9          1.8             3.0           2.9        HCPI between 2-3%
                   New Zealand                 4.0           1.2          1.6             1.8           2.2        HCPI between 1-3%
                   China                       5.4           2.8          2.8             3.0           3.4           HCPI at 4%*
                   India                       8.9           7.9          7.6             5.7           6.8       WPI at 6.5% Mar-13*
                   Hong Kong                   5.3           4.2          4.1             4.4           3.7                  -
                   Taiwan                      1.4           1.2          2.0             1.7           1.8       M2 growth at 2.5-6.5%
                   South Korea                 4.0           2.4          2.3             2.8           2.7         HCPI: 2.5%-3.5%
                   Singapore                   5.2           4.3          4.5             3.4           3.2      HCPI at 3.5-4.5% for '12
                   Malaysia                    3.2           1.8          1.8             2.8           2.3      CPI at 2.5-3% for 2012
                   Thailand                    3.8           3.1          3.1             4.4           3.2       CCPI between 0.5-3%
                   Indonesia                   5.4           4.5          4.5             5.7           5.3      HCPI between 3.5-5.5%
                   Philippines                 4.7           3.4          3.3             4.2           4.0        HCPI between 3-5%
                   BRICs                       6.6           4.4          4.5             4.2           4.5
                   Advanced                    2.7           2.1          2.0             2.0           1.8
                   World                       4.3           3.2          3.2             3.2           3.1
                   * Consensus Economics October 2012.              Source: GS Global ECS Research


Source: Consensus Economics, GS Global ECS Research estimates.


Goldman Sachs Global Economics, Commodities and Strategy Research                                                                                            17
November 6, 2012                                                                                                                                      Asia Interest Rate Strategy




Interest Rate Forecasts


Interest Rate Forecasts


                   Interest Rate Forecasts
                                                                      3-Month Horizon                 6-Month Horizon                 12-Month Horizon
                                                    Current*        Forward    Forecast             Forward    Forecast             Forward     Forecast
                   Hong Kong 3M                      0.40            0.30         0.20               0.30         0.20               0.40         0.20
                   5-yr swaps                        0.72            0.78         1.20               0.85         1.20               1.00         1.45
                   India 3M                          8.10            8.10         8.10               7.80         7.60               8.00         7.40
                   5-yr swaps                        7.10            7.05         7.40               7.02         7.20               7.01         7.00
                   Indonesia 3M                      4.90            4.80         4.90               4.90         4.90               5.20         4.90
                   Malaysia 3M                       3.20            3.20         3.30               3.30         3.30               3.10         3.30
                   5-yr swaps                        3.23            3.25         3.30               3.27         3.50               3.36         3.70
                   South Korea 3M                    2.80            2.80         2.90               2.70         2.90               2.70         3.10
                   5-yr swaps                        2.79            2.80         2.90               2.81         3.10               2.85         3.30
                   Philippines 3M                    0.50            1.40         1.00               1.50         1.20               1.50         1.50
                   Singapore 3M                      0.40            0.70         0.40               1.10         0.40               0.50         0.50
                   5-yr swaps                        0.92            1.01         1.20               1.08         1.30               1.26         1.40
                   Taiwan 3M                         0.90            0.90         0.90               1.00         0.90               0.90         1.00
                   5-yr swaps                        0.89            1.00         1.10               1.01         1.10               1.07         1.30
                   Thailand 3M                       2.90            3.10         2.90               3.10         2.90               2.70         2.90
                   5-yr swaps                        3.02            3.07         3.30               3.12         3.60               3.23         3.80

                   US 3m                               0.30           0.30            0.30            0.30            0.30            0.40            0.30
                   US 10-yr Yield                      1.70           1.80            2.00            1.90            2.10            2.00            2.30
                   Japan 3 M                           0.20           0.40            0.40            0.30            0.40            0.30            0.40
                   Japan 10-yr Yield                   0.80           0.80            1.00            0.90            1.10            1.00            1.20
                   Australia 3-mth rate                3.10           3.10            3.20            2.80            3.00            3.00            2.80
                   Australia 10-yr Yield               3.20           3.20            3.80            3.20            4.00            3.30            4.30
                   New Zealand 3M                      2.80           2.50            2.70            2.50            2.70            2.70            2.70
                   New Zealand 10-yr Yield             3.50             -             4.30              -             4.30              -             4.50
                   Close 01 November 12, mid-rates for major markets. We are currently using December 2012, March 2013 and September 2013 contracts for 3-month
                   forward rates.


Source: GS Global ECS Research estimates.




Goldman Sachs Global Economics, Commodities and Strategy Research                                                                                                             18
November 6, 2012                                                                                                            Asia Interest Rate Strategy




FX Forecasts

                                                                          FX Forecasts
                                                          3-Month Horizon               6-Month Horizon        12-Month Horizon
                                        Current*       Forward      Forecast         Forward      Forecast   Forward     Forecast
                   EUR/$                     1.29        1.29            1.25         1.30          1.33      1.30         1.40
                   $/JPY                 80.20          80.10           77.00         80.00        76.00      79.80       74.00
                   A$/$                      1.04        1.03            1.00         1.03          0.98      1.01         0.98
                   $/CNY                     6.30        6.30            6.34         6.32          6.34      6.35         6.28
                   $/HKD                     7.75        7.75            7.80         7.75          7.80      7.74         7.80
                   $/INR                 53.72          54.54           51.50         55.33        51.00      56.77       50.00
                   $/IDR                     9615       9710            9800          9825         9400      10080         9200
                   $/KRW                     1092       1097            1140          1102         1100       1109         1050
                   $/MYR                     3.05        3.07            3.05         3.08          3.00      3.10         2.97
                   NZ$/$                     0.83        0.82            0.81         0.82          0.81      0.81         0.81
                   $/SGD                     1.22        1.22            1.23         1.22          1.21      1.22         1.20
                   $/TWD                     29.3        29.1            29.4         29.0          29.0      28.9         28.8
                   $/THB                     30.7        30.9            30.8         31.0          30.5      31.3         30.3
                   $/PHP                     41.2        41.1            41.0         41.1          40.5      41.1         40.0
                   * Close 01 November 12.          Source: GS Global ECS Research



Source: GS Global ECS Research estimates.




Goldman Sachs Global Economics, Commodities and Strategy Research                                                                                   19
November 6, 2012                                                                                                                 Asia Interest Rate Strategy




Disclosure Appendix


Reg AC
I, Fiona Lake, hereby certify that all of the views expressed in this report accurately reflect my personal views, which have not been influenced by
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Goldman Sachs Global Economics, Commodities and Strategy Research                                                                                         20
November 6, 2012                                                                                                       Asia Interest Rate Strategy




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Goldman Sachs Global Economics, Commodities and Strategy Research                                                                              21

				
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Description: Asian Rates Sensitive to US and Europe Risks, But Not China