Goldman Sachs: Tactically Cautious

Goldman Sachs note that "several developments over the past week make us a bit less constructive on the Yen in the near-term. First and foremost, the US 10-year TIPS yield rose by over 10bp in the days following the Georgia Senate run-off elections. JPY tends to be the most vulnerable G10 currency to a back-up in long-end real rates, and we expect this theme to remain in focus for now. Second, senior Japan officials met last Thursday to emphasize authorities' focus on maintaining "stability" in financial markets (according to Bloomberg), after USD/JPY hit its lowest intraday level last week since March and likely in the context of PM Suga's reported directive in December to defend the 100 level (Nikkei). Third, Tokyo has now entered a renewed state of emergency, which our economists expect to limit Q1 sequential growth to just +0.2% qoq saar - over 3pp lower than their prior forecast of +3.5%. All that said, we continue to see several reasons for JPY to grind down to 100 vs USD over the course of this year, despite our pro-cyclical cross-asset views. But for investors who want to add USD/JPY shorts to diversify a pro-risk portfolio, we think we may see better levels to do so within the coming weeks."