Goldman: Sitting, Waiting, Wishing On The BoJ

Goldman Sachs note that “over the past few months, we had been sceptical about chasing JPY strength due to our core U.S. views for 2023 of no recession and higher real yields, which argued for a period of renewed weakness if market expectations were to shift in the direction of our own projections. That indeed occurred over recent weeks. But now, speculation has increased around another BoJ policy tweak at Governor Kuroda’s last meeting.”

• “Despite this, we would caution investors against being tactically short USD/JPY here. Our own economists think a tweak to YCC looks unlikely to come before Q2.”
• “If no imminent policy change proves correct, then USD/JPY can move more freely with U.S. real rates and we see the risks as still skewed towards higher U.S. real yields.”
• “If yields are rising, historical performance tell us that the JPY typically weakens, particularly if US equities are also rising - such as in periods of a positive growth shock, the main reason behind the JPY’s underperformance YTD - but it also weakens even if equities are falling, just not as much as pro-cyclical currencies.”
• “As a result, unless U.S. real rates see some relief perhaps due to renewed recession concerns on payback in the upcoming activity data or a more dovish-than-expected Fed either in Powell’s testimony or the meeting on March 22 (and assuming we are right that the BoJ keeps policy unchanged next week), we think that tactical USD/JPY upside has room to extend a bit further.”