Mongolia:Gold StandardStatistical Analysis of Mongolia’s Foreign Exchange

Overview

• Given that:

• Mongolia’s currency is fully convertible for a wide array of international currencies and does fluctuate regularly in response to economic trends. (U.S. Department of State: Embassy of the United States; Ulaanbaatar, Mongolia; Reports on Mongolia: 2015 Investment Climate Statement, May 2015 (http://mongolia.usembassy.gov/mobile//ics2015.html))

• “…the Bank of Mongolia has been persistent in pursuing a floating exchange rate regime” (Bank of Mongolia Annual Report 2014e, p. 65.)

• Why has Mongolia suffered a four-year period of falling strength in foreign exchange: 2012-2016?

• Is Mongolia’s ForEx strength based in GDP and Balance of Payments? Suffering due to China’s economic woes? –Or is something else in play?

the Initial View: Historical Relationships

y = -0.0004x + 1.2404R² = 0.1655

0.00

0.50

1.00

1.50

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2.50

0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000

10

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₮ B

uy

s __

_$U

S S

po

t F

X R

ate

$USD Gold/Oz

Chart 1A: March 29, 1996 - December 31, 20121000 ₮ Buys ___$US Spot ForEx (Y-Axis) Vs. Gold Price $US/Oz (X-Axis)

1000 ₮ Buys ___$US Spot FX Rate Linear (1000 ₮ Buys ___$US Spot FX Rate)

the Secondary View: Changing Correlations

0.8

74

0.8

66

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16

-0.1

90

-0.6

05

-0.8

52

-0.6

92

-0.4

82

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05 -0

.70

1

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28

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65

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58

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51

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36

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48

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19

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32

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98

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45

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95

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48

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29

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90 -0

.16

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38

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81

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74

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43

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48

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52

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99

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32

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78 0

.79

8

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39

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68 0.8

58

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37

-1.00

-0.80

-0.60

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-0.20

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0.20

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0.60

0.80

1.00

Pe

ars

on

Co

rre

lati

on

R-S

tati

stic

Chart 1B:Correlation of 1000 ₮ MNT Buying ___ $USD to Spot Mineral Prices By interval

Au Ag Cu

the Tertiary View: Symmetry in Inflection

0.45

0.50

0.55

0.60

0.65

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0.75

1,000

1,100

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1,900

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₮ B

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_$U

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$U

SD

Go

ld/

Oz

Chart 2: January 1, 2013 - March 01, 2016Gold Price $US/Oz (Y1-Axis); 1000 ₮ Buys ___$US Spot ForEx (Y2-Axis)

Gold Price $US/Oz 1000 ₮ Buys ___$US Spot FX Rate

the Quaternary View: A Rough Correlation

y = 0.0004x + 0.0073R² = 0.7196

0.45

0.50

0.55

0.60

0.65

0.70

0.75

0.80

1,000 1,100 1,200 1,300 1,400 1,500 1,600 1,700 1,800

10

00

₮ B

uy

s __

_$U

S S

po

t F

X R

ate

$USD Gold/Oz

Chart 3: January 1, 2013 - March 01, 20161000 ₮ Buys ___$US Spot ForEx (Y-Axis); Gold Price $US/Oz (X-Axis);

1000 ₮ Buys ___$US Spot FX Rate Linear (1000 ₮ Buys ___$US Spot FX Rate)

the Quinary View: Recalling the Timing Delay

y = 0.0004x + 0.0548R² = 0.8853

0.45

0.50

0.55

0.60

0.65

0.70

0.75

0.80

1,000 1,100 1,200 1,300 1,400 1,500 1,600 1,700 1,800 1,900

10

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₮ B

uy

s __

_$U

S S

po

t F

X R

ate

$USD Gold/Oz

Chart 4: January 1, 2013 - March 01, 20161000 ₮ Buys ___$US Spot ForEx (Y-Axis) (2013-01-01 - 2016-03-02)

90-Day Prior Spot Gold Price $US/Oz (X-Axis) (2012-10-03 - 2015-12-03);

1000 ₮ Buys ___$US Spot FX Rate Linear (1000 ₮ Buys ___$US Spot FX Rate)

the Senary View: Thinking Like a Minerals CFO90-Days Forward Contracts on Past Average Prices

y = 0.0004x + 0.0398R² = 0.9528

0.45

0.50

0.55

0.60

0.65

0.70

0.75

1,000 1,100 1,200 1,300 1,400 1,500 1,600 1,700 1,800

10

00

₮ B

uy

s __

_$U

S S

po

t F

X R

ate

$USD Gold/Oz

Chart 5: January 1, 2013 - March 01, 20161000 ₮ Buys ___$US Spot ForEx (Y-Axis) (2013-01-01 - 2016-03-02)

90-Day Prior 90-Day MA Gold Price $US/Oz (X-Axis)(2012-07-05 - 2012-10-03 through 2015-09-04 - 2015-12-03);

1000 ₮ Buys ___$US Spot FX Rate Linear (1000 ₮ Buys ___$US Spot FX Rate)

Confidence to Generate a Regression Analysis

0.45

0.50

0.55

0.60

0.65

0.70

0.75

10

00

₮M

NT

Bu

ys

___$

US

D

Chart 6A:Forecasting Mongolia's 90-Day Forward Foreign Exchange Rates With Ag, Au, Cu

Spot FX Rate On Date 90-Day Forward Forecast (90-Day [MA: Au, Cu, Ag])

1000 MNT Buys ___USD =+ (0.01599199) X [90-Day Avg of Silver Price from 180 days to 90 days Prior to FX rate]+ (-0.00004116) X [90-Day Avg of Gold Price from 180 days to 90 days Prior to FX rate]+ (-0.02347884) X [90-Day Avg of Copper Price from 180 days to 90 days Prior to FX rate]+ 0.360038021R2=0.96311

Confidence to Confidence Intervals

0.45

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0.80

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MN

T B

uy

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_US

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Chart 6B:Forecasting Mongolia's 90-Day Forward Foreign Exchange Rates With Ag, Au, CuSpot ForEx Period: March 1, 2013 - March 1, 2016Minerals Pricing Period: Aug 30, 2012-Nov 30, 2012 Through Sep 1, 2015-Dec 2, 2015

Spot FX Rate On Date 90-Day Forward Forecast (90-Day [MA: Au, Cu, Ag]) Upper Limit: μ +3.00σ Lower Limit: μ -3.00σ

1000 MNT Buys ___USD =+ (0.01599199) X [90-Day Avg of Silver Price from 180 days to 90 days Prior to FX rate]+ (-0.00004116) X [90-Day Avg of Gold Price from 180 days to 90 days Prior to FX rate]+ (-0.02347884) X [90-Day Avg of Copper Price from 180 days to 90 days Prior to FX rate]+ 0.360038021

Confident: How Confident?

• R2=0.96311

• The maximum divergence of the ₮MNT:$USD forecasted 90-days prior to the Actual ₮MNT:$USD foreign exchange rate was 8.45%

• 97.5%; numerically 827 forecast instances out of 848 total data points fell within 2.5 standard deviations of the 0.096% Mean

• During the period October 2, 2012 through December 2, 2015, this model quite accurately predicts the future exchange rate, based on the prior 90-days average price of the minerals: Silver, Gold, and Copper; and the formula produces the prediction 90-days before the ₮MNT:$USD actually manifests itself in the international finance market

Raw Figures Table 3Adjusted to Absolute

Values

8.452% Max 8.452%

-4.860% Min 0.021%

0.096% Mean 1.893%

2.496% StDev 1.628%

0.06336334Expected Upper at ___

StDev0.059643

-0.0614532Expected Lower at ___

StDev-0.02177

2.5 StDev

848 Count 848

827 Count If Between 820

97.524% PerCent in Interval 96.698%

Next Steps…

• Build a model to predict volatility in GDP according to different mixes of investment among Mongolia’s economically productive sectors.

• The model will isolate the base volumes of mineral commodities sold and grow these volumes within the bounds projected by GoM, and other entities reporting these trends;

• The model will simulate fluctuations in commodities prices according to the commodities’ historical statistical changes following Monte Carlo analysis;

• The model will calculate changes in GDP year over year and record percentage changes (registering volatility as standard deviations around the mean simulation growth rate);

• Versions of the model will simulate rapid growth in Primary Sector (non-minerals), Secondary Sector (finished food, textiles, etc.), and Tertiary Sector (tourism) for comparing against the current mix of GDP components.

Implications of the Model for Mongolia ForEx?

• This research is a pedagogical pursuit; not investigative journalism.

• This research aims to isolate the model for Mongol ForEx; the analysis aims to present knowledge toward modeling Mongolia’s macro-economic environment and its constraints.

• The Monte Carlo projections aim to assist government and banking to invest wisely; and produce commonwealth for all residents in Mongolia.

• This study is an intellectual pursuit to assist Mongolia’s growth strategies; and/or present queries to revise those growth strategies.

Thank You So Much!

One potential Macro-Environment…