Deutsche Bank has a simple message for anyone trying to trade currencies in the headlines this year: stop. A war in the Middle East, a change in leadership at the Fed, sharp swings in technology valuations — none of which mattered as much as any one thing. The bank’s analysis shows that yields were the dominant driver of currency movements for 2026.
When growth holds up, volatility stays under control and yield spreads are pushed up, explains Deutsche Bank’s George Saravelos.
“It is the incredible resilience of global growth that is allowing the spread, and as we said a few weeks ago, this regime is likely to continue in the coming months,” Saravelos wrote in a note today.
Start with the yen, because that’s the clearest example of the problem. The Japanese yen issue is mathematics. Forward returns are simply too low compared to the rest of the world, and in a carry system this is a death sentence. The Development Bank sees only two ways out in the second half: either the Bank of Japan accelerates to a growth rate 2% faster than market rates, or Tokyo designs a real repatriation of domestic capital. The bank is anticipating concrete measures – tax changes, shifts to the GPIF – after Finance Minister Katayama’s overnight press conference teased a new package to encourage domestic investment. The precedent worth remembering is 2014, when a shift in government pension inflow expectations moved the yen long before any policy was actually implemented. Given the risks, DB Bank says it funds long trades in Swiss francs rather than Japanese yen.
For the dollar, DB declines just as the hawkish story unfolds. Their summer FX chart pointed to hawkish Fed repricing as the main upside risk for the dollar, and it came true. To get another move, markets will need to price in 75-100 basis points or more of rallies – enough to restore the dollar to its true high-yielding status. DB believes US forward pricing is now fair, and with upside risks to European growth in the second half, they see no compelling reason to chase EUR/USD lower or the dollar generally higher.
In emerging markets, the screen indicates laggards. INR and TRY stand out as carry trades that have underperformed relative to their return levels, and DB likes long trades in both. The most interesting observation is in North Asia: despite all the massive stock repricing there, FX carry has never been attractive – and it’s about to get worse for the won. The Bank of Korea is now priced to match US interest rates over the next 12 months, meaning KRW’s profile will look very different a year from now.
Takeaways are almost boring, and that’s the point. In a market where everyone wants to trade geopolitics and Fed policy, money is being made by clipping yields in a world that won’t slow down. Until the growth cracks or the size increases, the load system is the system.
