Goldman: Go Short Vs USD To Position For Real Rate Reversal

Goldman Sachs note that “the JPY has strengthened by nearly 9% since the start of November, the second largest gain (after NZD) across G10 FX, driven by a significant decline in U.S. real rates and what looks to be large unwinds of long USD/JPY positions.”

• “Not only is positioning now appearing more neutral, we also see a fundamental reason to expect renewed JPY weakness.”
• “USD/JPY remains the best proxy for U.S. real rates and further USD weakness driven by a dovish Fed would likely extend the recent JPY strength.”
• “The BoJ may also be preparing to shift its current YCC policy at some point next year, which would be positive for the JPY in our view, and our economists now see possible adjustments in 2023.”
• “However, outweighing these risks, our rates strategists believe that the sharp downward repricing of medium- and long-run rates for this cycle appears overdone given current data (and our economists’ projections) and thus should reverse.”
• “Therefore, we are issuing a new trade recommendation to go long USD/JPY over a 1-2 month horizon with a target of Y143 and a stop of Y132.”