Deutsche Bank’s latest “FX Blueprint” frames the summer narrative around two central calls: a structural turn lower in the US dollar and the re-emergence of the Japanese yen as the counter-punch.
The note has 11 themes, including buying gold and EUR/CAD but I’ll highlight the main message.
The top theme is titled “Breaking Benjamin” and argues that the damage to the dollar is already visible in the flows. Deutsche Bank points to an unprecedented flip in the historical relationship between the USD and US risk assets: the currency has begun to rise and fall alongside domestic equities rather than against them, undermining its traditional safe-haven role. High-frequency data show a sustained slowdown in foreign purchases of US securities, while America’s net international investment position has sunk deeper into negative territory than any other G10 economy.
We argue that the damage to the
USD has been done and the funding of the dollar’s two big holes – the budget and
the current account – is now emerging as a market driver. In this world, relative
interest rate differentials become less important, valuations and flow dynamics
more relevant.
The bank argues that this twin-deficit backdrop, coupled with an expanding fiscal impulse in Europe, Canada and parts of Asia, leaves the dollar exposed if overseas investors begin to repatriate capital. They say that carry is now the dollar’s only clear support, and that it’s unlikely to offset the structural headwinds it faces.
Theme #2
DB’s second theme is “It’s Reigning Yen,” and the strategists recommend buying JPY against USD and, for investors wary of negative carry, against the over-valued Swiss franc. They argue that the near-perfect four-year correlation between USD/JPY and the US 10-year Treasury yield is breaking down as US exceptionalism fades and the Bank of Japan moves gradually toward policy normalisation.
It’s been a simple equation for almost four years now – USD/JPY
has had a 95% correlation to the US10y, and the current yield at 4.4% suggests
USD/JPY should be 150. That’s well above spot, but looks like a justified breakdown
of the relationship, as the existing regime is fading
Inflation in Japan is proving sticky: two-thirds of the CPI basket is now rising, services PPI has held near 3 percent for a year, and corporate surveys show expectations for inflation above target. Deutsche Bank believes real yields in Japan remain far too low and notes that the BoJ’s pace of quantitative tightening already exceeds that of the Fed when scaled to GDP. On valuation metrics such as DBEER and purchasing-power parity, USD/JPY fair value is seen at 140 or lower, while Japanese life insurers still hold roughly USD 2.5 trillion in US assets; even a modest lift in hedge ratios or outright repatriation could accelerate yen strength, something we’ve seen already this week.
From a trading perspective, Deutsche Bank advises fading dollar rallies and positioning for yen appreciation as the most levered expression of a broader anti-dollar move.
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