Goldman Revise Forecasts

Goldman Sachs note that “verbal intervention to support the JPY has already begun, but the level that could elicit direct FX intervention remains uncertain. The majority of historical interventions to strengthen the yen occurred with USD/JPY in the range of Y127-135. On March 28, the BoJ conducted another fixed-rate operation to defend its current YCC target of 0.25% for 10-year JGBs, possibly signalling its tolerance for modestly more JPY depreciation. Our rates strategists have revised up their forecasts to show the 10-Year U.S. Tsy yield reaching 2.70% at year-end, and our expectations for wider U.S.-Japan rate differentials - supported by a BoJ reaffirming its commitment to YCC, for now - and higher oil prices, as well as the lack of direct FX intervention, suggest further upward pressure on USD/JPY in the near term. As a result, we are revising up our 3-month forecast to Y123 (vs. Y117 previously) to reflect continued weakness around current levels, with possible further USD/JPY upside in the very short term. Over a longer horizon, we still think that the upside in USD/JPY is getting constrained as we get closer to historical intervention thresholds. Moreover, the JPY’s deep undervaluation and its typical use as a recession hedge could make it an increasingly attractive buy for longer-term investors. Combined with our broad Dollar views, we still see reason to forecast JPY appreciation in the medium-term with USD/JPY at Y120 in 6 months and Y118 in 12 months (vs. Y117 in 6 months and Y115 in 12 months previously).”