Goldman sees modest yen weakness from US rates

BLOOMBERG

Pressure from the US bond market may lead to modest yen weakness in the short-term, outweighing any positive impact from speculation of a Bank of Japan (BOJ) policy shift, according to Goldman Sachs Group Inc.
If markets continue to price in resilient US growth and more interest-rate hikes than expected, there is scope for further “tactical yen underperformance,” wrote strategists including Kamakshya Trivedi in a note. The Japanese currency typically weakens when inflation-adjusted US yields are rising, they said.
The yen fell to a two-month low of 136.55 per dollar on Monday before paring losses.
“We have repeatedly said that US real rates should matter most,” the strategists wrote. “Thus the current market environment looks less favorable for significant dollar-yen downside, even in the case of a hawkish BOJ policy shift.”
The Japanese currency has rallied more than 10% from its October low, helped in part by the BOJ’s surprise move in December to raise its ceiling for benchmark yields. Traders are betting a change of leadership at the central bank, with economist Kazuo Ueda set to take over in April, could be the catalyst for further policy tweaks, which could help strengthen the yen further.
Ueda was expected to answer questions from lawmakers for a second session.
“Such speculation (and likely continued market focus on a potential BOJ exit even if the March meeting itself disappoints) combined with elevated recession concerns should keep any yen underperformance somewhat limited,” the team wrote.