Goldman: Further Pressures, But Sticking With Constructive Medium-Term View

Goldman Sachs note that “while negative terms of trade developments - i.e., higher natural gas prices and higher oil prices (prior to the latest sell-off) - have weighed on the Yen this year, USD/JPY has mostly been trading in line with real rate differentials YTD. We expect this fairly tight relationship to persist due to the BoJ’s commitment to YCC and thus see few headwinds to further Yen depreciation in the very near term. Specifically, our economists expect no changes to YCC at next week’s meeting (nor through at least the rest of Kuroda's term, as of now), while markets expect the Fed to hike by another 75bp at the July meeting. That said, we continue to see a strong case for JPY appreciation over the medium-term, resulting from either (i) a significant U.S. economic slowdown/recession or (ii) a change in Japanese monetary policy. A scenario in which Japanese inflation remains uniquely low even as the economy reopens, allowing the BoJ to remain on hold while other central banks hike, has seemed like a low probability outcome, in our view. This was reinforced by our economists’ latest upward revisions to their inflation forecasts, now showing new core CPI at 2% by year-end. Overall, we would expect to see further upside pressure on USD/JPY in the next few weeks, barring any significant sell-off in oil prices or a (very unlikely) dovish shift in Fed expectations.”