Goldman: BoJ Widens The Band, And The Possibilities

In lieu of yesterday’s YCC adjustment from the BoJ, Goldman Sachs note that “if this is a technical realignment as the BoJ has suggested, then there should be fairly limited spillovers for the JPY, especially given that the 4% move down in USD/JPY already exceeds our model estimates for an end to YCC. However, to the extent this signals the start of a regime shift in Japan, then there is clearly more room for the currency to run.”

• “For now, our assumption is more of the former - a technical adjustment and a sign that policy rates could be adjusted further in coming months, but still working under the same basic framework as before. In that scenario, US rates will continue to have more “degrees of freedom” than JGBs, and remain the primary driver for USD/JPY over time.”
• “Under our baseline view that markets are over-pricing U.S. recession odds and under-pricing the Fed cycle, USD/JPY should move back higher over coming months. Indeed, the Yen is no longer even an outlier, or the worst performing G9 currency year-to-date, suggesting that there is limited sign of a special “YCC discount” anymore. However, in the near term we expect markets to raise the odds of a more material BoJ shift, which remains a real possibility. We are closing our long USD/JPY trade recommendation and place our forecasts under review while we reassess.”