Strengthening of Yen caught many funds by surprise
2022.12.22 07:45
Strengthening of Yen caught many funds by surprise
Budrigannews.com – Because of concerns that the Bank of Japan’s hawkish pivot on monetary policy earlier this week could mark the beginning of a hawkish regime shift, some of the backers of the dollar have been forced to restrain their bullish bets.
Goldman Sachs announced that it was changing its forecasts and abandoning its long USD/JPY trade recommendation, the first victim of the 4% plunge earlier this week.
In a note, Goldman Sachs stated, “We are closing our long USD/JPY trade recommendation and placing our forecasts under review while we reassess.”
Following the BoJ’s announcement that it would modify its yield curve control program, which is intended to keep Japanese government bond yields capped at a specified target level, the need to step back has arisen.
The central bank’s 10-year Japanese government yields will be allowed to rise by as much as 50 basis points, or 0.5 percent, instead of the previous limit of 0.25%, under the revised policy measure. The debate over whether this marks the beginning of a hawkish regime shift or a one-off tweak has been sparked by the unexpected move from the BoJ, a central bank that has continued to lean dovish despite its peers front-loading rate hikes.
This discussion – the beginning of a hawkish system versus a simple specialized change – will probably decide the yen’s capacity to incur further harm for the greenback.
After global bond pressures pushed Japanese government bonds higher, BoJ governor Governor Haruhiko Kuroda stated that the move was necessary to correct yield curve distortions. Additionally, it should not be interpreted as the beginning of a hawkish shift.
Goldman Sachs seems to agree, thinking that the BoJ’s tweak is just a technical change. The investment bank claims that the fundamental framework of the BoJ, which is to bring an end to deflation through extremely dovish policy, has not changed. However, Goldman isn’t ready to fight the market at this time, at least not in the near future, when traders are betting on the very real possibility that the BoJ will welcome change.
Goldman Sachs stated, “[I]n the near term we are hesitant to engage in this view… because the market is likely to raise odds of a more material BoJ shift, which is a real possibility given there has also been a shift in BoJ communication recently.” “[I]n the near term we are hesitant to engage in this view.”
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Nevertheless, the investment bank appears to have some hope for a return of the dollar to the yen in the upcoming months. It asserts that the markets “are over-pricing the US recession odds and under-pricing the Fed cycle,” implying a rise in Treasury yields and most likely the yen to the dollar.
