Portfolio

Forecasting: EURO / USD using SMI Election Analysis

In the long shadow of the Brexit and US Presidential Election surprises, many feared that Germany would also move significantly to the right. The impact on the market was significant. By late 2016, the fear in the market became apparent with betting markets showing there was over a 30% chance that Germany’s far-right AfD candidate would become the next Chancellor of Germany. It was an amazing shift in the consensus expectations and the EURO and related assets suffered.

Social Media Influence (SMI) did not confirm such strength for the AfD or for other European populists in 2017 elections and it became apparent in late-2016 to early-2017 that the markets had simply entered a period of overshooting. In March 2017, ZettaCap published a report entitled Euro Assets to Appreciate as Social Media Influence (SMI) Forecasts Populist Underperformance, which should that populists in France, the Netherlands and Germany should underperform then-high expectations providing a window of opportunity for those interested in EURO assets.

Even as markets, polls and consensus expectations pointed to populist outcomes, SMI showed that such market expectations were overdone. The chart here shows SMI compared to polls for the three primary 2017 European elections and the 2016 US election. Whereas Trump shows strength going into voting, the European populists showed weakness.

ZettaCap only reversed its call on Euro and related assets due to the 2017 Italian General Election. In contrast to the market which by that point was underplaying political risk, SMI actually showed exceptional strength of the Italian populists. ZettaCap correctly called the populists outperformance in the March 2018 report Euro Assets to Pause as Social Media Influence (SMI) Forecasts Populist/Regionalist Strength in Italian Election.

ZettaCap went against consensus expectations in the European elections. In early 2017, SMI pointed out that European populists should underperform in France, the Netherlands, and Germany and result in Euro appreciation. In early 2018, SMI forecasted unexpectedly high support for Italian populists which would throw cold water on the Euro rally. These occasions showed SMI’s ability to pick-up on underlying political trends before polls, and thereby provide insights into currency movements.

The Euro was trading at 1.06 when ZettaCap called for long Euro in March 2017 and at 1.23 in March 2018 when ZettaCap reversed its call. This one year period was the Euro’s strongest in over a decade.

Important because:

• Social Media Influence (SMI) correctly called four major European elections,
• SMI made these calls against then-consensus expectations,
• ZettaCap highlighted the wide difference between SMI forecasts, consensus expectations and financial market movements to formulate investment strategy,
• First known case of using social media to forecast election outcomes while applying it to forex markets.