Goldman Mark USD/JPY Forecast Track Lower

Goldman Sachs write “since the BoJ meeting, we have seen some relief in both Japanese rates and USD/JPY, probably driven by some short covering. But the risk of an earlier-than-expected exit from YCC remains high (our estimates suggest that USD/JPY could fall by ~3% on such an outcome, though we could see an even bigger move in the immediate aftermath until the shift is fully digested), and markets will most likely continue to test the BoJ’s resolve in coming months.”

• “The high likelihood of a more significant policy change will probably keep the market pressure on the BoJ.”
• “We continue to expect U.S. rates to be the dominant driver of USD/JPY this year, but even small steps towards policy normalisation should benefit the JPY.”
• “While the BoJ’s apparent flexibility on the current policy stance has shifted the balance of risks in favor of further JPY strength, the combination of no imminent exit from YCC and our more constructive view on U.S. growth for 2023 relative to consensus fears of a recession should allow the USD to hold its ground against the JPY near-term.”
• “We see less scope for JPY depreciation in the short-term and have pulled forward the timing of appreciation, revising our USD/JPY forecast path to Y132, Y125, Y125 in 3-, 6- & 12 months (vs. Y136, Y136, Y126 previously).”