Goldman Sachs On Yen

The US bank is not fighting the downside in USD/JPY, but the pair may start to stabilize if US growth/rate expectations can start to stabilize.

• Goldman Sachs: "A Yenflection point. The Yen typically outperforms even other FX safe havens when markets worry enough about US growth to push both yields and equities lower, and that is exactly what we saw this past week. Now that USD/JPY has snapped back to fundamentals following a “perfect storm” of factors—and has even overshot the latest move in rates coincident with further positioning unwinds —the key to near-term performance will be how markets trade the US outlook and particularly the Fed’s response. At least initially, markets are implying that the Fed will react with additional cuts, including an over 80% chance of a 50bp cut in September. Our own economists agree that faster easing looks likely, but only at a 25bp pace if the July report indeed overstates the decline in underlying job growth as they suspect. Taken together, we would not recommend fighting the current downside momentum in USD/JPY, though we would also hesitate to position for it to extend much further. The surprise BoJ hike (vs consensus) this past week feels relatively inconsequential for the Yen—consistent with our long-standing view that the US backdrop should continue to dominate domestic monetary policy—but it has been another gust of wind in the “perfect storm” that may allow for a bit more follow-through in the very-near-term. That said, if markets become less concerned about US growth and rates can stabilize near current levels with renewed embrace of the soft landing narrative, then USD/JPY should go back to grinding higher. The question now is how quickly that time may come."