In Schweser, the two models show the analysis as: Traditional Model: Currency depreciation leads to long-term economic activity Long-term economic activity leads to higher equity prices Now in the diagram it shows the negative currency exposure arrow between ‘higher equity prices’ and ‘currency depreciation’. Is the negative domestic currency exposure due to the higher and lower values in the diagram? Or is it related to the same domestic currency exposure?
In the traditional model, currency appreciation and higher equity prices have a negative correlation. Therefore, you have a negative domestic currency exposure.