Goldman Still See Strong Case For Yen Recovery Over Medium-Term

Goldman Sachs note that “the BoJ kept yield curve control (YCC) in place at its latest meeting despite intense upward pressure on global rates and market speculation about a possible policy change. We continue to see a strong case for JPY appreciation over the medium-term, resulting from either (i) a significant US economic slowdown/recession or (ii) a change in Japanese monetary policy. A scenario in which Japanese inflation remains uniquely low even as the economy reopens, allowing the BoJ to remain on hold while other central banks hike, seems a low probability outcome, in our view. Over the very near-term we would expect more depreciation pressure on the Yen (upward pressure on USD/JPY) due to the BoJ’s commitment to YCC. Investors should consider short-dated USD/JPY call spreads for this outcome; the possibility of intervention limits the chances of sharp increase in USD/JPY, in our view; the CHF/JPY cross may also have further upside but we are reluctant to chase at current levels. Beyond that we will look for opportunities in USD/JPY shorts. Given uncertainty around the near-term Fed outlook, it may be prudent to wait until the next U.S. employment report (July 8) before adding USD/JPY downside expressions.”