Regime change in politics, yes. But what about a regime change in the forex market?

George Saravalos at Deutsche Bank makes two spectacular points in the aftermath of the election.

1) Beware regime shifts

He’s not talking about the political regime shift here, he’s talking about a regime shift in markets in terms of how cross-asset classes interact.

“Global risk assets are taking their cue
from US equities and generally doing well; in turn high-beta FX such as the
commodity currencies are outperforming. We would be very cautious in
extrapolating this price action and historical correlations going forward. The
US election outcome in our view is historical in nature; it has the capacity to
create a regime shift in markets whereby correlations break down due to highly
idiosyncratic and divergent shocks between the US and the rest of the world.
This is another way of saying it is entirely possible for one market to go up
(US) and another to go down (rest of world) even if this has never happened
before in history.”

2) A Trump/Republican policy mix is not priced in

The question isn’t whether a Trump win is priced in, or a Republican sweep. It’s ‘what policies are priced in’ and he argues that markets currently reflect a “very moderate mix” compared to what was campaigned on, particularly in terms of fiscal deficits and tariffs. That’s led to benign pricing around inflation outcomes.

“If the Trump policy platform goes ahead, there
is still much more to go in the dollar and broader FIC market pricing, in our view,” he writes.

This article was written by Adam Button at www.forexlive.com.