USDJPY Daily
Goldman Sachs discusses its outlook for USD/JPY, focusing on the role of US interest rates and real spreads in determining the pair’s future performance.
Key points:
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US interest rate dominance:
- Back to basics: Goldman Sachs expects the USD/JPY pair to become more aligned with fundamentals, especially US interest rates, following the recent turmoil caused by the carry trade.
- Positive outlook for the United States: With a more optimistic baseline for the US economy, Goldman expects a gradual uptrend in the USD/JPY pair, supported by their expectations of higher stocks and a weaker Chinese yuan.
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US recession risk:
- Negative scenario: Goldman Sachs notes that if the US enters a recession, interest rate strategists expect nominal rates to fall to 3.5-3.75%. In such a scenario, the FX model suggests a potential 5% decline in USD/JPY, and the impact would likely be compounded by weaker equities and more carry trade liquidations.
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Real price differences:
- Increase engagement: Goldman expects USD/JPY to become more closely linked to real interest rate differentials going forward, although they remain cautious about the consistency of this relationship given recent periods of turmoil.
- Upward pressure: Assuming the US avoids recession and interest rates remain attractive (despite the additional hikes expected from the Bank of Japan), Goldman expects renewed upward pressure on USD/JPY.
conclusion:
Goldman Sachs remains cautiously optimistic about the outlook for USD/JPY, expecting it to gradually rise if the US economy remains strong and real interest rate differentials push the pair higher. However, it acknowledges significant downside risks in the event of a US recession.
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