Goldman Sachs Turns Even More Bearish on Yen

Overview

Goldman Sachs has significantly revised its forecasts for the USD/JPY currency pair, now predicting a rise from a previous target of 155 to 165 yen per U.S. dollar. This adjustment positions Goldman Sachs as one of the most bearish investment banks regarding the Japanese yen, which is expected to reach its weakest level since 1986.

Key Takeaways

• 12-month USD/JPY forecast raised from 155 to 165.
• 3-month forecast increased from 160 to 162; 6-month target from 158 to 163.
• Current trading level for USD/JPY is around 162.
• Goldman Sachs is now among the most bearish institutions on the yen, according to Bloomberg.
• Options markets indicate a 72% probability of USD/JPY reaching 165 by June next year.
• Hedge funds are holding their largest net short positions in the yen since 2017.

Reasons for Yen Weakness

Goldman Sachs attributes the anticipated further weakness of the yen to three main factors:

1. Persistently high U.S. Treasury yields.
2. Mounting fiscal pressures in Japan.
3. The Bank of Japan's slow pace of interest rate hikes.

Despite the yen appearing undervalued based on fundamental models, Goldman believes that the significant interest rate differential between the U.S. and Japan will continue to favor the U.S. dollar.

Carry Trades and Market Dynamics

Goldman Sachs recommends using the yen as a funding currency for carry trades, where investors borrow low-cost yen, sell it in the FX market, and invest in higher-yielding assets. This strategy is likely to remain attractive as long as the Bank of Japan maintains accommodative financial conditions, further pressuring the yen.

Currency Intervention Skepticism

Goldman Sachs expresses skepticism regarding the effectiveness of potential currency interventions by Japan's Ministry of Finance. They believe that even direct yen-buying operations would only provide temporary relief unless there is a significant change in U.S. Treasury yields or a more hawkish stance from the Bank of Japan.

Market Positioning and Risks

Current market positioning shows hedge funds holding their largest net short positions in the yen in eight years. The FX derivatives market suggests a 72% probability of USD/JPY reaching 165 by mid-next year, indicating that shorting the yen is becoming a crowded trade. This could lead to sharp corrections if expectations for U.S. or Japanese monetary policy shift unexpectedly.

Upcoming Events

Investors are keenly awaiting the release of the Federal Reserve meeting minutes, which may provide insights into:

• Future Fed rate cuts.
• Trends in U.S. Treasury yields.
• Upcoming Bank of Japan policy decisions.
• Potential interventions by Japanese authorities.

A hawkish tone from the Fed could further strengthen the U.S. dollar, while weaker economic data might provide temporary relief for non-dollar currencies.

Technical Analysis

The USD/JPY pair remains in a strong uptrend, trading within a defined ascending price channel. The lower boundary is near 158, with resistance around 162.8. A sustained break above this resistance could reinforce bullish momentum, while a rejection may lead to a pullback towards the lower boundary.