Goldman Sachs On USD/JPY, Sees Upside Risks Into 2024

The US bank weighs in on the recent USD/JPY correction. It sees this recent move down primarily due to positioning and sees gradual upside risks in the pair as we progress into 2024, see below.

Goldman Sachs: "Follow the yield. USD/JPY declined by a couple big figures over the past two trading sessions, to levels just below 150. But equities and the 10-year rate differential were both roughly unchanged over that period, suggesting that unwinds of long USD/JPY positioning may have been the biggest driver. More broadly, we continue to expect the Yen to be primarily driven by the macro—especially since we remain more dovish than the market on the BoJ’s exit path—and our baseline forecasts of still-elevated US real rates, resilient US growth, and a further grind higher in US equities over the year ahead argues for persistent depreciation pressures. Now if we see periods of lower real rates as the market presses the “return of the Fed put” narrative, that should relieve some of the upside pressure in USD/JPY. But we still see limited scope for Yen appreciation as any decline in US yields would likely be short-lived without a signal from the FOMC that earlier, non-recessionary cuts are on the table—or, more significantly, without evidence of an imminent US recession. Overall, we expect a bumpy path for USD/JPY along the way to gradual further upside as i) the risks of intervention and possibly an earlier NIRP exit persist, and ii) given the potential to periodically shift to a market regime of higher equities and lower yields, which tends to be supportive for the Yen. That said, we see the risks as skewed towards an even “stronger for longer” Dollar in 2024, likely coinciding with more persistent Yen weakness."