Deutsche Bank FX yields have been the main force behind currency moves this year, according to a note from George Saravelos.
He said yield differentials have mattered more than headlines on war, leadership change at the Fed, or swings in tech valuations. He added that global growth has stayed resilient. As a result, volatility has remained contained and carry trades have continued to work.
Saravelos wrote that this backdrop is likely to last in the coming months. Therefore, Deutsche Bank sees the current carry regime persisting if growth holds up.
Deutsche Bank FX Yields Shape Yen View
Deutsche Bank used the yen as its clearest example. The bank said Japan’s front-end yields remain too low against the rest of the world. In a carry-driven market, that leaves the yen at a disadvantage.
DB sees two possible ways out in the second half. Either the Bank of Japan moves to 2% faster than markets expect, or Tokyo pushes a real return of domestic capital. Meanwhile, the bank is watching for firm steps after finance minister Katayama pointed to a new package to support domestic investment at an overnight press conference.
The note cited tax changes and shifts by GPIF as measures to watch. It also pointed to 2014, when changes in GPIF flow expectations moved the yen before policy action arrived. Because of those risks, DB said traders should fund carry trades with the Swiss franc rather than the yen.
Dollar and Emerging Market Carry Trades
On the dollar, Deutsche Bank said it is turning more cautious even after a hawkish Fed repricing played out. Its summer FX Blueprint had flagged that repricing as the main bullish risk for the dollar. However, the bank said markets would need to price 75 to 100 basis points or more of hikes to give the dollar true high-yielder status again.
DB said U.S. front-end pricing now looks fair. Additionally, it sees upside risks to European growth in the second half. For that reason, the bank said it sees little reason to push EUR/USD lower or the broad dollar higher.
In emerging markets, DB highlighted INR and TRY. The bank said both have lagged relative to their yield levels, and it favors long positions in each. Meanwhile, it said North Asia offers a different picture, because FX carry there has not looked attractive despite a large equity repricing.
DB said that setup is set to worsen for the won. The Bank of Korea is now priced to match U.S. rates over the next 12 months, which would leave KRW with a very different carry profile a year from now.
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