A big question facing markets is the extent to which the impact of Trump’s presidency has been priced in before he takes office.
George Saravelos, head of currency research at Deutsche Bank, has the answer, and his methodology is as interesting as his conclusions.
What Saravelos did was to create a maximum and minimum scenario for Trump’s policy mix — particularly on fiscal spending, tariffs and immigration.
The scenario that maximizes Trump's policies includes a 1% fiscal expansion, tariffs on China of more than 50%, a general tariff of 10% starting in 2026, and a suppression of immigration in the first six months to levels similar to those of Trump's first presidency.
"What would the market price in this scenario? The Fed's policy rate would be 5% or above and the ECB's policy rate would be 1% or below, a spread of 400 basis points," said Saravelos.
In contrast, under a business-as-usual scenario, i.e. a Trump-minimized policy scenario, the gap between the Fed and ECB policy rates would be 100 basis points.
Currently, the market is pricing in a spread of about 200 basis points, or one-third of the maximum scenario.
He said the ratio is consistent with other indicators, such as breakeven inflation rates and the dollar. "In our model, the dollar's safe-haven premium is only 3%, while it was as high as 10% during the first trade war. The bottom line is that the market is not over-pricing the Trump effect at all."
Saravelos said he remains bullish on the dollar and said a fall in the euro to parity would mean that markets have priced in close to 50% of Trump’s maximum policy mix, “and there could be more downside depending on what happens next year.”
On Friday, the euro fell nearly 0.5% against the U.S. dollar during the day and briefly fell below the 1.04 mark as the euro zone Purchasing Managers' Index data came in weaker than expected.
Article forwarded from: Jinshi Data