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Forex Portfolio for February 2011
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Forex Portfolio for February 2011

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The Forex Portfolio remains firmly negative towards the USD and to a lesser extent towards the EUR though both net short positions have been reduced in January. The net short exposure to GBP is nearly …

The Forex Portfolio remains firmly negative towards the USD and to a lesser extent towards the EUR though both net short positions have been reduced in January. The net short exposure to GBP is nearly negligible now

Published in: Economy & Finance

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  • 1. February 1, 2011 Forex Portfolio for February 2011David Karsbøl  The model returned 0.47%* in January; primarily through long exposure to EURUSDChief Economist and EURAUD and short exposure to EURSEK.dka@saxobank.com+45 3977 4330  The model remains bearish on USD and EUR, but has also turned bearish on GBP.  The model has returned 0.47% YTD*.  The annualised return since inception is 7.62%*.  The model is rebalanced monthly on the first Danish business day 12 CET.Note to clients: The ForexPortfolio Allocation modelwill be relaunched with Allocation in Februarychanges to methodologyon 1 March 2011. The Forex Portfolio remains firmly negative towards the USD and to a lesser extent towards the EUR though both net short positions have been reduced in January. The net short exposure to GBP is nearly negligible now. The biggest long positions in EUR are against the US dollar, the Norwegian krone, and the Aussie. The EURUSD long position has, however, been toned down further in January. The Swedish krona is still the most preferred currency against the EUR, but the long exposure has been reduced even further in January. The CHF is a close second now, having seen its exposure increase more than 50% and the EURCHF thus sees the biggest change to its position. EUR-denominated account USD-denominated account GBP-denominated account EUR 1 million USD 1 million GBP 1 million EURAUD 110,230 AUDUSD -109,712 GBPAUD 110,230 EURGBP 67,600 GBPUSD -41,959 GBPUSD 261,688 EURUSD 261,688 USDCAD 70,458 GBPCAD 70,458 EURCAD 70,458 USDCHF -454,580 GBPCHF -454,580 EURCHF -454,580 USDJPY -34,443 GBPJPY -34,443 EURJPY -34,443 USDNOK 193,004 GBPNOK 193,004 EURNOK 193,004 USDSEK -412,350 GBPSEK -412,350 EURSEK -412,350 EURUSD -129,561 EURGBP -208,635 EURNZD 20,619 NZDUSD -26,568 NZDGBP -42,802 The suggested allocations above are based on an account size of EUR/USD/GBP 1,000,000. A spreadsheet for calculating allocations for custom-sized accounts can be found under Forex Portfolio Model Allocation at www.tradingfloor.com/fx-equity-research.
  • 2. February 01, 2011 The Saxo Bank Forex Portfolio ModelForex Portfolio: The model was back-tested* from October 1991 to September 2008 during which period it yielded 106.9% or 0.36% per month before costs in the EUR-denominated account*.Realized Returns From October 2008 to September 2009 the model was further back-tested on „out-of-Month Return (%) sample‟ data to further validate its performance. The model was launched in October 1, 2009.2009 October 0.322009 November 0.68 Saxo Bank Forex Portfolio Model: Realised Results* (Oct. 2009 - ) Accumulated capital2009 December -0.31 from investing EUR 1 ultimo September 20092010 January -0.41 1.42010 February 2.10 1.32010 March 0.17 1.22010 April 0.59 1.12010 May 0.96 1.02010 June 3.60 0.92010 July -1.62 0.8 03/10 12/10 09/09 12/09 06/10 09/102010 August 3.382010 September -0.80 Single Leverage (7.62% p.a.) Double Leverage (15.51% p.a.) Triple Leverage (23.66% p.a.)2010 October 0.492010 November -1.06 Saxo Bank Forex Portfolio Model: Backtesting Results* (Oct. 1991 - Sep. 2008)2010 December 1.43 Accumulated capital from investing EUR 12011 January 0.47 15.0YTD 0.47 12.5Since inception 10.29 10.0Since inception 7.62(annualized) 7.5 5.0 2.5 0.0 1991 1996 1997 1998 2003 2004 2005 1992 1993 1994 1995 1999 2000 2001 2002 2006 2007 2008 2009 Single Leverage (4.67%) p.a. Double Leverage (9.21%) p.a. Triple Leverage (13.59%) p.a. Saxo Bank Forex Portfolio Model - Monthly returns in backtesting* (%, Oct. 1991 - Sep. Obs. 2008) 35 30 25 20 15 10 5 0 0.0 6.5 7.0 7.5 8.0 8.5 9.0 9.5 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 10.0 -10.0 -3.5 -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 -9.5 -9.0 -8.5 -8.0 -7.5 -7.0 -6.5 -6.0 -5.5 -5.0 -4.5 -4.0 *Past performance disclaimer This publication refers to past performance. Past performance is not a reliable indicator of future performance. Indications of past performance displayed on this publication will not necessarily be repeated in the future. No representation is being made that any investment will or is likely to achieve profits or losses similar to those achieved in the past or that significant losses will be avoided. Statements contained on this publication that are not historical facts and which may be simulated past performance or future performance data are based on current expectations, estimates, projections, opinions and beliefs of the Saxo Bank Group. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. Additionally, this publication may contain forward-looking statements. Actual events or results or actual performance may differ materially from those reflected or contemplated in such forward-looking statements. 2
  • 3. February 01, 2011The model inputThe model‟s inputs are proprietary individual country indicators, which measure theunderlying economic strength (contraction or expansion) of the following 10 currencies:NZD, AUD, CAD, JPY, EUR, GBP, USD, CHF, SEK, and NOK. The country indicators, whichare designed to reflect the macroeconomic strength of each economy, are based on 22individual economic time series for each country.The allocation signals are generated by changes in spreads between the fundamentalcountry indicators. More capital is allocated to currencies with relatively strong economicactivity (and positive rate outlook), funded by short positions on currencies with weakeconomic activity (weak rate outlook). For example, if the Eurozone fundamental countryindex suddenly drops (increases) relative to the US fundamental index, the model, allelse being equal, would reduce (increase) exposure to EURUSD. Additionally, positionsare scaled up or down according to the volatility of the currency crosses in question sothe expected risk-adjusted return for positions in EURCHF is the same as for positions inthe normally more volatile EURCAD.Allocations are presented as net exposures against EUR, USD, or GBP to reduce both thenumber of possible combinations and most illiquid crosses.Returns are based on Bloomberg monthly carry-adjusted currency data. The modeltherefore does not include costs related to minimum trading size, slippage, rollover,spreads, and taxes.Allocation updateThe model will be published on www.tradingfloor.com by Saxo Bank on the first bankingday of the calendar month. While Saxo Bank publishes the model‟s suggested allocation,the bank is not responsible for the monthly reweighting of the portfolio.For a EUR-denominated account, the sum of all EUR positions following the model willdeviate from the amount allocated to follow the model. For example, the holder of a EUR1 million account might choose to allocate EUR 1 million to follow the model, but the sumof EUR exposure will not equal EUR 1 million. The reason is that one needs to look at thenet exposures. If the model is long 100,000 EURUSD and short 100,000 EURJPY, the netexposure in EUR on these two positions is actually zero. The sum of total position sizes inEUR might therefore deviate from EUR 1 million, since the model is only looking at netexposures of the currencies in question. The reason is that the model follows 10currencies, but the net exposures are established via only nine crosses. The sum of allthese exposures is then either net long or short, depending on the model‟s prediction onEUR itself.Attractive featuresThe model is always well diversified and is always in the market. It is therefore notexposed to “timing issues”. It does not use stops, since the overall volatility of returnstends to be low (especially on single leverage). One particularly interesting feature isthat returns tend to be almost completely uncorrelated to returns in stock markets(correlation = 0.10) and other risky asset classes (correlation to the CRB Index is 0.11).Therefore, if the back-testing since 1991 is indicative of future returns*, it would make alot of sense to use part of one‟s portfolio to allocate to the FX Model and therebydecreasing overall portfolio volatility without lowering returns too much (depends on theleverage used) or at all.*Past performance disclaimerThis publication refers to past performance. Past performance is not a reliable indicator of future performance. Indications of past performancedisplayed on this publication will not necessarily be repeated in the future. No representation is being made that any investment will or islikely to achieve profits or losses similar to those achieved in the past or that significant losses will be avoided.Statements contained on this publication that are not historical facts and which may be simulated past performance or future performancedata are based on current expectations, estimates, projections, opinions and beliefs of the Saxo Bank Group. Such statements involve knownand unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. Additionally, this publication maycontain forward-looking statements. Actual events or results or actual performance may differ materially from those reflected orcontemplated in such forward-looking statements. 3
  • 4. February 01, 2011NON-INDEPENDENT INVESTMENT RESEARCHThis investment research has not been prepared in accordance with legal requirements designed to promote the independence ofinvestment research. Further it is not subject to any prohibition on dealing ahead of the dissemination of investment research.Saxo Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise beinterested in the investments (including derivatives), of any issuer mentioned herein.None of the information contained herein constitutes an offer (or solicitation of an offer) to buy or sell any currency, product orfinancial instrument, to make any investment, or to participate in any particular trading strategy. This material is produced formarketing and/or informational purposes only and Saxo Bank A/S and its owners, subsidiaries and affiliates whether acting directlyor through branch offices (“Saxo Bank”) make no representation or warranty, and assume no liability, for the accuracy orcompleteness of the information provided herein. In providing this material Saxo Bank has not taken into account any particularrecipient‟s investment objectives, special investment goals, financial situation, and specific needs and demands and nothing hereinis intended as a recommendation for any recipient to invest or divest in a particular manner and Saxo Bank assumes no liability forany recipient sustaining a loss from trading in accordance with a perceived recommendation. All investments entail a risk and mayresult in both profits and losses. In particular investments in leveraged products, such as but not limited to foreign exchange,derivates and commodities can be very speculative and profits and losses may fluctuate both violently and rapidly. Speculativetrading is not suitable for all investors and all recipients should carefully consider their financial situation and consult financialadvisor(s) in order to understand the risks involved and ensure the suitability of their situation prior to making any investment,divestment or entering into any transaction. Any mentioning herein, if any, of any risk may not be, and should not be consideredto be, neither a comprehensive disclosure or risks nor a comprehensive description such risks. Any expression of opinion may bepersonal to the author and may not reflect the opinion of Saxo Bank and all expressions of opinion are subject to change withoutnotice (neither prior nor subsequent).Trade Currency and Price CurrencyWhen an investor trades in the Forex market, they always trade a combination of two currencies (a cross or currency pair) inwhich one currency is bought (long) and the other is sold (short). This means the investor is speculating on the prospect of one ofthe currencies appreciating in value in relation to the other.Forex Margin TradingMargin trading allows investors to buy and sell assets that have a greater value than the capital in their account. Forex trading istypically executed on margin accounts, and the industry practice is to trade on relatively small margin amounts since currencyexchange rate fluctuations tend to be less than one or two percent on any given day.Margin trading does involve a certain amount of risk. Since a position is being held that exceeds the actual value of the account, atrader could incur substantial losses if the market moves against his position. Thus, margin trading requires close monitoring ofmargin utilization, i.e. the amount of collateral being used to hold margined positions.If margin utilization exceeds collateral available for margin trading, positions must be closed, reduced, or additional funds must beposted to cover the position.This publication refers to past performance. Past performance is not a reliable indicator of future performance. Indications of pastperformance displayed on this publication will not necessarily be repeated in the future. No representation is being made that anyinvestment will or is likely to achieve profits or losses similar to those achieved in the past, or that significant losses will beavoided.Statements contained on this publication that are not historical facts and which may be simulated past performance or futureperformance data are based on current expectations, estimates, projections, opinions and beliefs of the Saxo Bank Group. Suchstatements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon.Additionally, this publication may contain forward-looking statements. Actual events or results or actual performance may differmaterially from those reflected or contemplated in such forward-looking statements.This material is confidential and should not be copied, distributed, published or reproduced in whole or in part or disclosed byrecipients to any other person.Any information or opinions in this material are not intended for distribution to, or use by, any person in any jurisdiction or countrywhere such distribution or use would be unlawful. The information in this document is not directed at or intended for “US Persons”within the meaning of the United States Securities Act of 1993, as amended and the United States Securities Exchange Act of1934, as amended.The Saxo Bank Group is under the supervision of the Danish Financial Supervisory Authority (In Danish: "Finanstilsynet") and issubject to the Danish Executive Order on Good Business Practice for Financial Undertakings.Saxo Bank A/SPhilip Heymans Allé 152900 HellerupDenmarkPhone: +45 39 77 40 00Reg. No. 1149CVR. No. 15731249This disclaimer is subject to Saxo Banks Full Disclaimer available at www.saxobank.com/disclaimer. 4