Deutsche Bank anticipates that the global foreign exchange market, which has remained notably calm despite significant swings in commodity prices and interest rates this year, is likely to maintain this stability through the end of the year. The bank projects a continued gradual depreciation of the US dollar against a range of Asian currencies, while also expecting the yen’s recent relative strength across cross-currency pairs to persist.

According to the bank, Asian currencies backed by current account surpluses continue to represent the most pronounced valuation divergence in global FX markets. For the euro-dollar pair, Deutsche Bank expects sustained range-bound trading, as resilient global economic growth and substantial tail risks surrounding the dollar limit the downside for the euro, while Federal Reserve rate hikes and elevated energy prices cap its upside potential.

In terms of strategy, the bank remains inclined toward carry trades but has shifted its stance from the more aggressive posture seen earlier this year to a markedly more cautious and selective approach. As certain positions become increasingly crowded and the real interest rate advantage of emerging market currencies over the dollar narrows, Deutsche Bank has begun to rebuild some long dollar positions against emerging market currencies, marking the first such move in a considerable period.

The bank also noted that progress toward a peace resolution in the Middle East before year-end could be a critical variable in determining whether its current cautious FX strategy proves effective.