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FUNDAMENTAL ANALYSIS

The Power of Perception

Why the Euro might well outperform expectations in 2016

The Power, Perception, Why the Euro, might, well, outperform, expectations, 2016, Fundamental Analysis, fx trader, forex

18 Jan 2016

Perception is, by one definition, ‘a way of regarding, understanding, or interpreting something’. Perception is a noun. It is a ‘something’. It’s carried in the mind; it exists. The word originates from the old Latin: percipere meaning ‘to understand’, seize. When we understand, we have ‘grasped the concept’. Perception results more from the psychologic and less from deductive logic. It is built up and accumulated from bits of information much the same way a personal computer happens to save up stray bits of data, cookies, pieces of deleted files and the like. What a computer cannot do, in spite of the very best efforts of its creators, is perceive; that is: ‘interpret or look on something in a particular way’. So a computer never tries to interpret those unrelated bits and pieces of information. The mind, on the other, never lets a useless piece of data go to waste. The mind will hold these scraps of information up to the light of uncertainty, turning them this way and that, much the same way a gem cutter looks for the optimal place to cleave a rough diamond. The perception which results does so from both relevant and irrelevant information. No two perceptions, of anything, can ever be exactly alike. In the universe of finance, markets are made in the midst of perceptions.

The Euro has had more than its share of critics and detractors right from the get-go. So much so, the word Eurosceptic has officially ascended into the English language. Many will scoff at the existence, indeed even the permanency of the Eurozone which in turn builds upon the perception of an economic zone whose eventual dissolution will relegate the Euro to a museum piece; an evolutionary dead-end placed alongside coins of vanished empires. It is in human nature to create perceptions. In a sense we are all gem cutters. However, the inexperienced gem cutters may indeed find faults to cleave but none which may create greater value from all of the smaller pieces, than does the whole.

The entire purpose of the European Union and the Euro was to establish an economic entity on par with the super-economies. Today, this would include the United States,  the People’s Republic of China and Japan. To this end it has succeeded. The EU aggregate gross domestic product of £12.435 trillion ($18.403 trillion), which is greater than that of the US at £11.643 ($17.231) trillion, China’s at £6.950 ($10.212) trillion and Japan’s at £3.09 ($4.573) trillion. In individual GDP rankings 3rd, 4th and 5th are EU member states: Germany at £2.6 ($3.848) trillion; the UK at £1.98 ($2.930) trillion and France at £1.9 ($2.812) trillion. To put that in perspective, the three aforementioned EU member’s GDP at collectively £6.48 ($9.950) trillion are nearly equal with China’s GDP. Include Italy, Spain, Netherlands, Sweden, Poland, Belgium, Austria and Denmark, and then the resulting GDP is a virtual equal to that of US.  However, to be fair, several of the above listed European Union members are not Eurozone members. This is where perception plays a part: aggregate Eurozone GDP is £7.766 ($9.590) trillion, comfortably ahead of China’s GDP, thus ranking it second in global GDP rankings1.

The Euro itself needs to be put into proper perspective, too. For example, the grid comparison chart on Figure 1 demonstrates the relative value of the Euro and the US Dollar vs. the Japanese Yen and British Pound Sterling since 1 January, 2002 when the Euro became the only coin of the EU realm. It’s interesting to note that since that day, the Yen has declined over 13.80% vs the Euro; in the same period the Yen has gained over 9.5% vs the Dollar; Sterling has declined 20.39% vs. the Euro; in the same period the Dollar has declined over 5.0% vs Sterling. The grid on Figure 1 demonstrates that Euro is performing, as it should, as a major reserve currency.

The Power, Perception, Why the Euro, might, well, outperform, expectations, 2016, Fundamental Analysis, fx trader, forex Grid Comparison Fig.1. Relative value of the Euro and the US Dollar vs. the Yen and British Pound Sterling since 1 January, 2002

Events, even unrelated events, often help create erroneous perceptions. The famous Bayeux Tapestry chronology of William’s 1066 A.D. invasion, stitches together the appearance of a comet and ghostly image of a fleet in the panel following King Edward’s passing and Harold’s ascension to the throne. The death of a king + alleged throne usurpation + comet = disaster. However, the battle at Hastings was many years in the making; the comet was a passing flash in the pan. All are somewhat familiar to the (alleged) unexpected unpegging of the Swiss Franc from the Euro.

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