Goldman Sachs Mark USD/JPY Outlook Higher

Goldman Sachs note that “the Yen depreciated sharply in the first two trading days of 2022, reaching its weakest level vs USD since early ‘17. We think risks to USD/JPY remain skewed to the upside, and are therefore revising our 3-month target to Y117 from Y115 previously (our new 3-, 6, and 12-month forecasts are Y117, Y117, and Y115, respectively, from Y115, Y113, and Y111 previously).”

• “While U.S. rates have already repriced significantly - now discounting about 3.25 funds rate increases this year - we could see additional upward pressure on the U.S. yield curve if the FOMC hikes at the March meeting, as our economists expect (a March hike is currently priced at an 85% probability). Moreover, like other Asian economies, Japan faces risks from another covid wave in the coming weeks: estimates from our global economics team show that only a very small portion of the Japanese population has “high” effective immunity from COVID (only Taiwan is lower among economies in our coverage).”
• “Investors have recently debated whether Japanese policymakers might step in to stem weakness in the JPY, now that the currency has reached levels on a trade-weighted basis that triggered similar policy guidance in the past. We see this type of action as relatively unlikely at the moment, given weak activity levels in the Japanese economy, risks from an omicron wave, and possible benefits from FX depreciation on domestic inflation and inflation expectations. U.S. policymakers also seem less likely to complain about JPY weakness, given the desire to reduce domestic inflation. Our current working assumption is that the odds of Yen-related policy guidance will increase as USD/JPY approaches Y120.”