Goldman Note Further ST Pressure, Although See Value As Recession Hedge

Goldman Sachs note that “USD/JPY rose for its eighth consecutive week, trading near Y130 as of Friday’s close, with the latest rally driven by the Bank of Japan's (BoJ) decision to keep all policy measures and forward guidance unchanged at its latest meeting. The government likely does not have a specific exchange rate target in mind, but we think further increases from current levels would imply high risk of intervention, based on past behaviour and the fact that policymakers have already been verbally pushing back on the rapid depreciation. On average, USD/JPY declined following past weak-side interventions, but with the BoJ continuing to signal no near-term changes to yield curve control (YCC), the likely effect could be more muted in this case. As a result, as long as U.S. yields rise, we expect to see continued upward pressure on USD/JPY - although this dynamic could change if the BoJ were to step back from YCC and/or recession risks were to rise enough to affect Fed rate hike expectations. But we think that the challenging cyclical backdrop will likely add some safe haven demand for the Yen, especially given the extent of its undervaluation on our standard metrics (roughly 25%). Moreover, we see asymmetric risk to the downside as USD/JPY faces further upside pressure, raising the risk of intervention and/or a significant monetary policy shift. Thus, we have marked-to-market our forecasts and would avoid going long the Yen on a tactical basis, but we have maintained a constructive medium-term view, given the number of factors that could send the Yen in a more positive direction - from intervention to recession. Our new forecasts show USD/JPY at Y128 in 3 months, Y126 in 6 months, and Y123 in 12 months (vs Y123, Y120, and Y118 previously).”