Goldman Sachs On Recent Yen Strength

The US Bank weighs in on the recent rebound in yen, arguing that it may not have legs given a steep tightening cycle from the BoJ is unlikely.

Goldman Sachs: "Temporary turbulence. A series of news reports make it clear the Bank of Japan is preparing to exit negative rates. At the same time, the reports indicate that the BoJ remains concerned about weak activity momentum and slowing inflation, and could replace YCC with fresh QE targets. We continue to think that while the likelihood of near-term policy adjustments has risen, the likelihood of a more pronounced tightening cycle has gone down. We think it is important to contextualize price action in the Yen in two ways. First, depreciation up until this past week happened in an environment of improving risk sentiment with higher equity prices and higher yields, which is the worst trading environment for JPY. Second, recent appreciation far outstrips the shift in BoJ expectations, in our view. We therefore think it was likely driven by positioning shifts to unwind JPY-funded carry trades. We expect that this reprieve for JPY will be limited. While anticipation around exit may continue to build in coming weeks, in our view, merely exiting negative rates is not enough to drive significant repatriation from Japanese-based investors or otherwise overcome the Yen’s negative beta to the risk-friendly macro backdrop we expect."