Deutsche Bank says global foreign exchange markets have shown a notable degree of stability this year despite sizable shifts elsewhere in financial markets, including in commodities and interest rates. The bank expects that relative calm to continue through year end.
In its FX outlook, the bank highlights a gradual decline in the U.S. dollar against the Chinese yuan as a likely trend. At the same time, the Japanese yen is expected to maintain its recent pattern of outperformance when measured against a range of currency crosses. Deutsche Bank characterizes surplus Asia currencies as the primary valuation outliers within global FX markets.
On the euro, the firm foresees the EUR-USD pair remaining range-bound. Deutsche Bank points to resilient global growth and notable dollar tail risks as arguments against much further euro weakness. However, it also cautions that Federal Reserve rate increases and elevated energy prices will limit the euro's upside potential.
Regarding trading strategy, the bank continues to favor carry trades but notes a shift toward greater selectivity compared with its more uniformly bullish stance earlier in the year. With market positioning described as more stretched and real rates in emerging markets compressed relative to the dollar, Deutsche Bank has added selective dollar-emerging market long positions to its portfolio for the first time in some period.
Finally, the firm highlights a key geopolitical uncertainty that could influence outcomes: whether peace in the Middle East is achieved by year end. Deutsche Bank notes that resolution of that conflict may ultimately determine whether its more cautious approach proves successful.
Context and implications
The bank's outlook combines observations about market calm, regional currency valuation differences, and a tempered stance on carry trades. Its positioning changes reflect both the compression of real rates in emerging markets versus the dollar and concerns about stretched positioning more broadly. Geopolitical developments in the Middle East are identified explicitly as an uncertainty that could change the outlook.