Goldman: Earlier BoJ Tweaks Mean More Limited Weakness, But Caution On Longs

Goldman Sachs note that “the JPY has been the outperformer in G10 over the past month, largely driven by the BoJ’s surprise tweak to YCC in late-Dec as well as growing investor interest in U.S. recession hedges.”

• “We think the currency has moved too far, too fast, having now notably exceeded the move in the 10-year real swap rate differential.”
• “Moreover, our own baseline macro views continue to argue for further JPY weakness, for two main reasons. First, our economists’ out-of-consensus call for no U.S. recession this year. Second, our economists' do not expect a complete exit from BoJ YCC in 2023.”
• “This suggests that recent JPY optimism could become challenged as long as visibility on the end of the Fed hiking cycle is less than clear and there remain no obvious signs of an imminent recession in the U.S.”
• “But with the upcoming BoJ meeting - which will reportedly include upward revisions to the Bank’s inflation forecast - and the forthcoming announcement of a new BoJ Governor likely encouraging the market to press even higher odds of a policy shift in Japan, we are revising down our USD/JPY forecast path to Y136, Y136 and Y126 in 3, 6 and 12 months (vs. Y142, Y145 and Y130 previously).”