Goldman: Look For Opportunities To Add Longs

Goldman Sachs write “in January, we were pushing back on the growing consensus for JPY strength, as our view of solid economic fundamentals till argued for renewed weakness, which we believed would outweigh greater BoJ policy flexibility.”

• “Though the rates market has already moved a long way to price in a negative growth outlook, equities have held up reasonably well and look particularly vulnerable. So even if yields remain sticky rather than continue to fall, lower equities should still drive USD/JPY lower.”
• “But the present risk of intensifying global growth concerns makes being long JPY an attractive position, since the best environment for JPY outperformance tends to be when markets price in a downside growth shock.”
• “Moreover, with the Fed’s own baseline appearing quite negative, the market now seems likely to return to an environment of asymmetric responses to upcoming data releases.”
• “Taken together, we are looking for opportunities to engage in going short USD/JPY, particularly if we see any back-up in rates over the coming week or so.”
• “But we still see a narrow runway for current USD underperformance to extend.”
• “We expect USD/JPY downside to be relatively short-lived, unless the economic outlook more clearly deteriorates, and thus have maintained our forecasts across the projection horizon, including Y132 in 3 months. In other words, we expect choppy rather than trending FX markets this year as policymakers work to achieve the right mix and magnitude of tightening.”