Mixed Results During a Challenging Year

6 January 2009 Short-Term Technical FX Global FX Strategy George Davis, CMT Chief Technical Analyst Dominion Securities Inc. +1 416 842 6633 george.davis@rbccm.com Mixed Results During a Challenging Year Background We have been producing and tracking our FX trade recommendations since 2003. The Short-Term Technical FX has been in existence in its current format since 2006 and tracks the progress of our short-term trade recommendations for USD/CAD. These recommendations are contained in our Canadian Dollar Morning Comment publication that is produced each day. Proposed strategies are based strictly on technical analysis - using candlestick charts, price patterns, indicator and oscillator analysis along with support and resistance levels in order to develop a trading plan. In turn, these inputs are used to formulate the stop loss and take profit levels that determine the reward to risk parameters for our discretionary strategies. The methodology used, along with our results, is summarized below. Methodology VaR Framework We have implemented the same methodology that is used to calculate returns for our Fundamental Tracker. Specifically, the Value at Risk (VaR) framework is used in order to determine our capital base and the notional risk allocated to each trading unit. A detailed explanation of the methodology is contained on page 5. We have established a capital base of USD $200,000, which translates to a notional risk limit of USD $2,000,000 based on a capital leverage factor of 10. We define one trading unit as USD $1,000,000 of notional risk. This provides us with the flexibility of trading a maximum of 2 units of notional risk at any one time, or breaking the risk down to half units of USD $500,000 should we wish to reduce our notional risk exposure as a function of a desired reward to risk parameter. Performance Return on Capital of 0.43% for 2008 Using a constant capital base of USD $200,000, our strategies produced a return on capital of 0.43% for the 2008 calendar year (see Figure 1). A total of 12 trades were recommended, with a win rate of 4. Five out of twelve months produced positive returns. A monthly breakdown of returns is provided below, with benchmark comparisons contained on pages 2 and 3. 1. Return on Capital (%) Period Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total Jan. to Dec. 2008 1.22 1.71 0.19-1.18 0.00-2.19-1.02 0.25 1.45 0.00 0.00 0.00 0.43% NOTE: Details on return on capital calculations and portfolio methodology are contained on page 5. Return Summary Year-to-Date Return on Capital 0.43% Annualized Return on Capital 0.43% Maximum Drawdown -3.9 Monthly Cumulative Returns (USD$) Monthly & Cumulative Return on Capital $5,000 5% Cumulative Return Monthly Return 3% $0 1% -1% ($5,000) Jan-08 Mar-08 May -08 Jul-08 Sep-08 Nov -08 Source: Capital Markets -3% Jan-08 Mar-08 May -08 Jul-08 Sep-08 Nov -08 Source: Capital Markets For pertinent disclosures, please see last page. See s research at www.rbccm.com.

6 January 2009 Global FX Strategy: Short-Term Technical FX Benchmark Comparison In this section, we compare the results of our portfolio with two benchmark indices - the and the Barclay BTOP FX Index. Additional information on these indices can be found at www.barclayhedge.com. The is comprised of 145 managed currency programs that are included in an equally weighted composite index. These programs trade currency futures as well as cash forwards in the interbank market. This index posted a return of 3.0 for the 2008 calendar year. Barclay BTOP FX Index The Barclay BTOP FX Index attempts to replicate the composition of the currency sector of the managed futures industry in reference to market risk exposure as well as trading style. A top-down approach is used whereby the largest currency trading programs by assets are included in the index. These programs represent no less than 5 of investable assets of the Traders Universe and must deal exclusively in FX futures or the interbank market. This index is equally weighted among all of the selected programs at the beginning of each year and is rebalanced every year. The index posted a return of -0.01% in 2008. Comparative Return Profile: Mixed Results This Past Year Based on our return of 0.43%, the Short-Term Technical FX underperformed the by -2.59% (see Figure 2). Conversely, the Short-Term Technical FX was able to outperform the Barclay BTOP FX Index by 0.4 (see Figure 3). Hence, the results of our short-term trading strategies were mixed at best, making the generation of positive alpha difficult to achieve in 2008. A complete summary of the performance of each trade recommendation is contained in Figure 8 on page 4. 2. Performance Versus Barclay Currency - 2008 3. Performance Versus Barclay BTOP FX Index - 2008 4. 1. 2. 0.5% 0. 0. -2. Short-Term FX Underperformance -0.5% Short-Term FX Barclay BTOP FX Index -4. -1. Source: Capital Markets, BarclayHedge Source: Capital Markets, BarclayHedge The frequency of our proposed strategies declined dramatically this year especially in the second half of the calendar year. Notably, our total of 12 trades versus 39 in 2007 makes it difficult to extrapolate our results given the limited sample size. The sharp increase in FX and global financial market volatility served to create very limited risk/reward opportunities over the short-term time horizon. This elevated volatility created a number of false breakouts that limited the effectiveness of our short-term trading methodology. With the reward parameters often dwarfed by that of risk, it became increasingly difficult to propose compelling trade recommendations after August of this year. Hence, after registering negative returns in April, 2

Global FX Strategy: Short-Term Technical FX 6 January 2009 June and July, we deliberately remained on the sidelines in the last calendar quarter of 2008 in order to preserve capital and avoid unattractive risk/reward trades. While we knew that this decision would compromise our ability to generate positive returns for the year, we felt that it was the most responsible way to manage risk in an environment of increased volatility, uncertainty and risk aversion. Historical Performance From a historical standpoint, our technical portfolios had outperformed selected benchmark indices for 4 consecutive years (from 2004-2007). However, as we have discussed above, this year s performance was mixed in that we underperformed the while slightly outperforming the Barclay BTOP FX Index. Performance data for our portfolios versus the for the 2004-2007 time period is displayed in Figures 4-7 below. 4. Performance Versus Barclay Currency in 2007 5. Performance Versus Barclay Currency in 2006 1 1 - - Short-Term FX 1 1 1 - Short-Term FX Source: Capital Markets, BarclayHedge Source: Capital Markets, BarclayHedge 6. Performance Versus Barclay Currency in 2005 7. Performance Versus Barclay Currency in 2004 11% 1 9% 7% 5% 3% 1% -1% - Technical FX 7% 5% 3% 1% -1% - Technical FX Source: Capital Markets, BarclayHedge Source: Capital Markets, BarclayHedge Tactical Responses to Increased Market Volatility With the elevated levels of volatility limiting the number of attractive risk/reward trading opportunities in 2008, we will be forced to adopt a new tactical approach for the 2009 calendar year. While we will continue to emphasize shorter-term trades, this will require increasing our risk profile by widening out our stop loss parameters. In order to mitigate this development, consideration can and should be given to breaking down our trading units in to quarter units. Secondly, some thought will be given to trading strategies that encompass longer time horizons (i.e. medium-term). 3

6 January 2009 Global FX Strategy: Short-Term Technical FX Closed Positions The following table represents a chronological history of all closed USD/CAD trades for the 2008 calendar year, along with the performance of these trades: 8. Closed USD/CAD Positions Year-to-Date Entered Position Amount Entry Exit Gain (Loss) Profit (Loss ) a ROC b 23-Jan-08 Short USD $ 500,000 1.0300 1.0250 50 $2,439.02 1.2 04-Feb-08 Long USD $ 1 million 0.9950 1.0000 50 $5,000.00 2.5 27-Feb-08 Short USD $ 500,000 0.9800 0.9831 (31) ($1,576.65) -0.79% 25-Mar-08 Long USD $ 500,000 1.0120 1.0160 40 $1,968.50 0.9 26-Mar-08 Long USD $ 500,000 1.0160 1.0189 (29) ($1,576.65) -0.79% 01-Apr-08 Long USD $ 500,000 1.0221 1.0199 (22) ($1,078.54) -0.5 07-Apr-08 Short USD $ 500,000 1.0110 1.0136 (26) ($1,282.56) -0.6 10-Jun-08 Short USD $ 1 million 1.0195 1.0240 (45) ($4,394.53) -2.19% 16-Jul-08 Short USD $ 500,000 1.0025 1.0066 (41) ($2,036.56) -1.0 18-Aug-08 Long USD $ 500,000 1.0570 1.0630 60 $2,822.20 1.41% 20-Aug-08 Long USD $ 500,000 1.0590 1.0541 (49) ($2,324.26) -1.1 23-Sep-08 Short USD $ 500,000 1.0390 1.0330 60 $2,904.16 1.45% TOTAL: $864.13 0.43% (a) Returns are calculated in USD. (b) Return on capital calculation based on a constant capital level of USD $200,000. NOTE: Details on return on capital calculations and portfolio methodology are contained on page 5. 4

Global FX Strategy: Short-Term Technical FX 6 January 2009 Market Risk Capital: Assumptions and Methodology We have used the Basle Committee on Banking Supervision (BIS) regulatory guidelines to calculate the capital required to cover the potential market risk of s Short-Term Technical FX. 1. Capital is based on the 10-day 99th percentile value-at-risk (VaR) (a one-tailed confidence interval) times a multiplication factor. The multiplication factor measures the difference between a 99% confidence VaR and an appropriate capitalization requirement. The multiplier is 3 for most trading businesses. We have assigned a 99th percentile one-day VaR limit of USD $20,000 to our portfolio. Applying the above definition: Capital = 10 x USD $20,000 x 3 = USD $189,736.66. Accordingly, we set our capital at USD $200,000. 2. VaR for most currencies is assumed to be approximately 1% of notional risk. Hence, given our established VaR limit of USD $20,000, our notional risk would be: USD $20,000/1% = USD $2,000,000. We therefore assign a notional risk limit of USD $2,000,000 to our portfolio. The VaR limit will supersede the notional risk limit at all times. 3. Capital leverage equals the capital multiplied by 1 unit of the VaR. Capital leverage = [ 10 x 3] x 1 = 9.49, or approximately 10 times. Therefore, notional risk/capital equates to capital leverage. In our case: USD $2,000,000/ USD $200,000 = 10. 4. Alternatively, the notional risk limit also equals the capital leverage multiplied by the capital. In our portfolio it is 10 x USD $200,000 = USD $2,000,000. This agrees with our calculations in #2 above. 5. Size of each trade: USD $1,000,000 is the size of each trading unit unless otherwise stated. A maximum of two unit trading positions can be outstanding at any time (i.e. USD $2,000,000 of total notional risk divided by USD $1,000,000 of notional risk per trade), unless the position size is modified and otherwise stated. 6. Capital is assumed to be constant: A simplification of the return on capital calculation has been made by assuming that our capital will remain constant throughout the year. The return on capital is therefore calculated based on a constant capital base of USD $200,000. 7. returns are based on monthly data. All returns are based on positions that have been closed out and are calculated in U.S. dollars. 8. The maximum drawdown on the portfolio is calculated based on the difference between peak-to-trough returns on closed trades for the year. 9. Returns are calculated without incorporating the cost of carry. Summary of Technical FX Methodological Variables Variable Amount Risk limit: VaR USD $20,000 Capital multiplier: 10 times Capital: USD $200,000 Capital leverage: 10 times Notional risk limit: USD $2 million Source: Capital Markets 5

Global FX Strategy Russell Jones Global Head of Fixed Income and Currency Research Royal Bank of Canada Europe Limited +44 207 029 7076 Adam Cole Global Head, FX Strategy Royal Bank of Canada Europe Limited +44 207 029 7078 Sue Trinh Senior Currency Strategist Royal Bank of Canada, Sydney Branch +61 2 9033 3333 Matthew Strauss CFA Senior Currency Strategist Dominion Securities Inc. +1 416 842 6631 David Watt Senior Currency Strategist Dominion Securities Inc. +1 416 842 4328 George Davis CMT Chief Technical Analyst Dominion Securities Inc. +1 416 842 6633 Capital Markets Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on request. To access our current policy, clients should refer to http://www.rbccm.com/cm/file/2c%2c63022c00.pdf or send a request to CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7. 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