The performance of our Long Term Monitor- An assessment

THE PERFORMANCE OF OUR LONG TERM MONITOR
AN ASSESSMENT

In mid-may our long term monitor has generated a negative signal for the Eur-Usd. We consider it useful therefore to examine why we consider this signal a relevant element to adjust strategic exposure in the currency.

Our long term monitor is a proprietary quantitative formula that seeks to offer an explicit pointer as to the underlying direction of the market for an average time horizon of 6-12 months.

From November 2005 this is the 6th signal generated by our Long Term Monitor.
For the five completed cycles the relevant results are summarized here:

-Average duration of cycle: 13 months

-Variance in duration: Shortest: 3 months, Longest: 32 months

-Resulting average change in the exchange rate: 34 figures per cycle

-Variance: minimum change: 28 figures, maximum change: 44 figures

Resulting average change in exchange rate in %: 26%

Variance: minimum percentage change: 22%, maximum change: 38%

All the concluded 5 cycles have been identified by winning signals.

Notes:

There is a wide variance in cycle duration (3 to 44 months with an average of 13 months).

The performance in terms of Percentage change in the exchange rate is however considerably more homogenous: average gain of 26%. If we exclude the statistically odd cycle characterized by its extreme duration (32 months) and statistically abnormal percentage change (38%) we obtain a remarkable homogeneity of results per cycle: Average of 23.5% (with individual results of 23%, 23%, 22%, 26%). Even the shortest cycle (3 months) has produced a variation of 23%).

Conclusions:

 The Long Term Monitor has a reliable record of identifying major changes (exceeding 20%) in the direction of the Eur-Usd.
 In spite of this it should not be construed as a fail safe indicator as a statistically uncharacteristic wrong signal is bound to occur at some point.
 We consider it a major element informing our strategic view and advice pertaining to the direction of the Eur-Usd and the resulting hedging posture for underlying exposures.

A. Ferreira
May 19th 2011