Synopsis:

Goldman Sachs expresses caution on holding tactical long positions in the Japanese Yen (JPY) in the near term, despite its attractiveness as a hedge against a slowing US economy and potential recession risks.

Key Points:

• Economic Context:

  • US Economy: Slowing economic conditions and increased recession risks make the Yen a favorable hedge.
  • Macro Forecasts: More balanced macro forecasts suggest the USD/JPY cross may trend higher, limiting significant upside for the Yen.

• Factors Influencing JPY Outlook:

  • Interest Rates and Risk Sentiment: If rates remain stable and risk sentiment remains supportive, recent Yen strength could unwind.
  • US Activity Data: Continued softening in US economic data or difficulties in equities adjusting to gradual Fed cuts could lead to further Yen appreciation.
  • BoJ Policy: Any JPY gains might offset potential Bank of Japan (BoJ) hikes.

• Cautionary Notes:

  • Tactical Longs: Goldman Sachs advises caution on tactical long positions in the Yen, highlighting vulnerability to potential upside surprises in US retail sales.
  • Fed Outlook: The Yen's attractiveness as a hedge is contingent on the Fed's policy trajectory; shifts in Fed expectations could impact JPY dynamics.

Conclusion:

Goldman Sachs remains cautious on tactical long positions in the Yen despite its role as a hedge against a slowing US economy. They anticipate potential Yen strength may be limited if current economic and risk conditions persist, and any tactical long positions could be vulnerable to unexpected positive developments in US retail sales or shifts in Fed policy.