The better the macro situation, the weaker the Japanese yen? Goldman Sachs sees the Japanese yen falling to 155 in the short term

Recently, Goldman Sachs raised its forecast for the USD/JPY exchange rate, citing expectations that a relatively stable macroeconomic environment in the coming months may exert downward pressure on the Japanese Yen.

In a report on Friday, strategists including Kamakshya Trivedi at Goldman Sachs stated that Goldman Sachs expects the USD/JPY exchange rate to reach levels of 155, 150, and 145 in the next 3 months, 6 months, and 12 months, respectively, up from previous expectations of 145, 142, and 140.

Goldman Sachs' move aligns with hedge funds that are increasing their bearish bets on the Japanese Yen.

At the Bank of Japan (BOJ) meeting in March, while the BOJ's policy shift signaled the end of the world's last negative interest rate policy, it also pledged to maintain an accommodative monetary policy stance. This led to market expectations that the BOJ's monetary policy would remain accommodative, causing the Japanese currency to fall to its lowest level since 2024. Hedge funds have also been increasing their bearish bets on the Yen.

According to the latest data from the Commodity Futures Trading Commission (CFTC), in the week ending March 19, the same week the BOJ announced the end of the negative interest rate policy, leveraged investors in the currency market significantly increased their contracts betting on the depreciation of the Yen, reaching 80,805 contracts, approaching the six-year high of 83,562 contracts set last month.

Better Macro, Weaker Yen?

Goldman Sachs' strategy team stated that a robust macroeconomic risk environment is expected to continue to be unfavorable for the Yen. They also mentioned that although the Federal Reserve may cautiously cut interest rates due to slowing inflation, this is unlikely to boost the value of the Yen.

The team further analyzed:

"Rate cuts reduce the likelihood of an economic recession, and economic recession risks often activate the safe-haven appeal of the Yen."

Japan Bids Farewell to the Negative Interest Rate Era, Yet Unable to Break the Yen Carry Trade Pattern

CFTC data shows that since 2021, hedge funds have been consistently shorting the Yen. In recent years, due to the widespread expectation in the market that even if the BOJ begins policy normalization, its monetary policy will remain accommodative, this strategy continues to be popular.

The recent rate hike by the Bank of Japan did not significantly narrow the interest rate differential between the US and Japan. The Yen, as a typical low-yield currency, remains the preferred source of funds for carry trades - macro traders continue to use the Yen for carry trades, seeking higher returns on overseas investments.

Bipan Rai, Global Foreign Exchange Strategy Director at the Canadian Imperial Bank of Commerce (CIBC), commented on the BOJ's statement:

"Although the BOJ's policy shift has a certain dovish tilt, it is not enough to trigger a large-scale capital outflow. In the long run, the Yen will continue to be a key source of funds for carry trades." In the current context of lacking clear policy guidance, market participants have engaged in widespread speculation about the timing of the next rate hike. Since the beginning of the year, the Japanese Yen has become the weakest currency in the G10 currency group, depreciating by nearly 7% against the US Dollar. Similarly, in 2023, the Yen also experienced the largest decline among G10 currencies.

At the same time, asset management companies have increased their bearish bets on the Yen, while hedge funds are even more bearish on the Euro, Australian Dollar, and Canadian Dollar. The data shows:

Changes in net positions for hedge funds are as follows:

• Net short positions on the Yen increased by 5951 contracts to 80805 contracts
• Net short contracts on the Euro increased by 11627 contracts to 32921 contracts
• Net long positions on the Pound increased by 8424 contracts to 31078 contracts
• Net short positions on the Australian Dollar increased by 22067 contracts to 31791 contracts
• Net long contracts on the New Zealand Dollar decreased by 1890 contracts to 1383 contracts
• Net short positions on the Canadian Dollar increased by 2142 contracts to 23400 contracts
• Net short contracts on the Swiss Franc decreased by 4396 contracts to 2798 contracts
• Net long contracts on the Mexican Peso increased by 15849 contracts to 45186 contracts

Changes in net positions for asset managers are as follows:

• Net short positions on the Yen increased by 25624 contracts to 59529 contracts
• Net long contracts on the Euro decreased by 21923 contracts to 307858 contracts
• Net short positions on the Pound increased by 17341 contracts to 36709 contracts
• Net short positions on the Australian Dollar decreased by 853 contracts to 100425 contracts
• Net short contracts on the New Zealand Dollar increased by 7303 contracts to 11928 contracts
• Net short positions on the Canadian Dollar increased by 5807 contracts to 45891 contracts
• Net short contracts on the Swiss Franc increased by 5866 contracts to 13297 contracts
• Net long contracts on the Mexican Peso increased by 9780 contracts to 173897 contracts