Markets haven't yet priced in a Biden win and so the dollar still has plenty of room to weaken, Deutsche Bank says

• Markets haven't yet priced in a Joe Biden win, which means the dollar still has plenty of room to weaken, Deutsche Bank said on Tuesday.
• "With the dollar starting to weaken, many now claim this election outcome is priced in," strategist George Saravelos said. "We disagree."
• Saravelos noted that real money investors tend to refrain from making big portfolio changes before a historic event unfolds.
• The US election is "of such historical importance that a shift towards a new approach in trade/foreign policy and potentially bigger twin deficits will take many weeks to be priced in," he said.

Markets have not yet priced in a Joe Biden election victory as real money investors are not comfortable changing their portfolios before certain historic events play out, Deutsche Bank said on Tuesday.

"With the dollar starting to weaken, many now claim this election outcome is priced in," George Saravelos, the bank's head of global foreign exchange research, said of a Biden win and Democratic sweep. "We disagree."

To establish his point, Saravelos used the euro-dollar price action earlier this year as an example. The European Union had struck a deal in July to borrow billions for the first time in history. The landmark deal, aimed at reconstruction of the bloc, was agreed after days of negotiations. The dollar remained under pressure as the euro rose to a 1-1/2 year high.

"Even though it was becoming increasingly apparent that an agreement was coming, the euro only rallied after final confirmation of a deal," he explained in a note Tuesday. "The market – especially real money investors – did not feel comfortable changing allocations before such a historic event was out of the way."

"The same goes for the US election: it is of such historical importance that a shift towards a new approach in trade/foreign policy and potentially bigger twin deficits will take many weeks to be priced in," Saravelos wrote.

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If President Donald Trump remains in office, that may still lead to a reversal of some recent trends. But by the way investors are placing their bets, Saravelos argues that the 10% risk premium on Trump is so large that there may be "plenty of room for the dollar to weaken" if Biden wins.

A "risk premium" is the minimum amount of excess return, above the risk-free rate, that an investor requires to take on a certain level of risk.

The dollar could decline particularly against emerging market currencies, he said. This is where positioning is the lightest right now, and would offer relative growth drivers for investors, he said.

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