Goldman: Stumbling On Stronger Stocks, But Still A Great Recession Asset

Goldman Sachs note that “in a week in which equities rebounded from their lows the Japanese Yen was the worst performing G10 currency. However, we still think the Yen offers attractive asymmetry due to rising U.S. recession risks and the prospect for a change in monetary policy in Japan itself. In a U.S. recession, we recently argued that end-2024 OIS rates would fall to 1-2%, or about 75-175bp below current levels. As a rule-of-thumb, G10 currencies move about 8% for every 100bp change in rate differentials, and we could envision an even larger move in the Yen today due to its cheap starting valuation and generally short positioning. Meanwhile, Yen depreciation and higher global commodity prices have lifted inflation in Japan. As our rates strategy colleagues note, this has resulted in expectations for a change in monetary policy and significant dislocations in Yen rates markets. Over the past week Market News International reported that rising global rates and Yen weakness may be moving the BoJ towards a policy change, which could come in the form a language tweak at the July meeting (e.g., dropping reference to covid outbreaks) which could then “allow a modification of easy policy after the summer” (e.g., at the September meeting). We think investors should consider owning USD/JPY downside structures in options now, and look to go short USD/JPY in spot on clear weakness in the U.S. labor market and/or signs of an imminent change in the BoJ’s policy stance.”