Goldman Sachs on the Bank of Japan and JPY.
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Key Takeaways:
1. Expectation of an Adjustment to YCC: Goldman Sachs economists expect an adjustment to the Yield Curve Control (YCC) in July. This could appease any concerns in the Japanese administration.
2. Potential Impact of a YCC Scrapping: If the Bank of Japan (BoJ) surprises the market by scrapping YCC rather than just tweaking it, Goldman Sachs expects that a 4-5% sell-off in the JPY would be a reasonable baseline. This estimate is slightly higher than their previous one but still implies a smaller effect than what many expect.
3. Limited JPY Strength in the Medium-Term: Unless the BoJ becomes significantly more hawkish and puts rate hikes on the table, Goldman Sachs sees limited scope for JPY strength over the medium term, despite its attractive valuation and recent foreign equity inflows.
4. Upward Revision to USD/JPY Forecast: Goldman Sachs has revised their forecast for the USD/JPY. Their colleagues’ recent upward revisions to the US terminal rate and the S&P 500 index imply more room for X/JPY upside, with the potential for USD/JPY to trade closer to 145 over the next month, rather than their current 3-month forecast of 140. This, combined with the key risk of renewed Fed hawkishness on sticky inflation, skews their projections for the path of USD/JPY over the next 12 months to the upside.
In summary, Goldman Sachs believes that the Japanese Yen will likely remain relatively weak against the US Dollar in the medium term. They also expect an adjustment to the YCC by the BoJ in July and have revised their forecast for the USD/JPY to be skewed to the upside over the next 12 months
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ps, Japan data due today:
This article was written by Eamonn Sheridan at www.forexlive.com. Source