Goldman Sachs: Near-Term Caution

Goldman Sachs note that "while we see several reasons for the JPY to outperform its rates "beta" this year, the currency retains some sensitivity to rising global yields. Our rates strategists recently highlighted the risks of an overshoot in U.S. Treasury yields, leading to further flattening in the 7s30s and 10s30s curves. Given that Japanese nominal 10Y yields are pinned, a US rates sell-off at that end of the curve should increase the rate differential further in favor of the Dollar. As a result, we think that JPY stands out as an attractive funder on certain crosses. The main risks to its use as a funder include many of the same reasons we think JPY could outperform its rates beta. Given currently low FX hedging costs, low valuations, and scope for increased demand for Japanese equities, JPY's typical beta to rates could be smaller than we have observed historically. However, our analysis suggests that even in this type of environment, JPY is still among the strongest options for funding EM FX."