between the United States and its trading partners, there are some discrete events, such as tax rate reductions, that will have substantial impact on the real exchange rate and can be analyzed before implementation. Other events such as oil shocks may not be easily predictable. Once they occur, however, they could be immediately analyzed and incorporated in the portfolio.
The decision rule for this portfolio strategy is quite simple: If the U.S. real exchange rate appreciates vis-à-vis one of our trading partners, for example, Germany, then the U.S. stock market will outperform the German stock market. As a consequence, German stocks will be excluded from the portfolio. If the real exchange rate depreciates, German stocks will be included in the portfolio.