Goldman Sachs Group Inc. sees the yen weakening to 165 per dollar in a year’s time, driven in part by Japan’s interest rate differentials with the US.
The Wall Street bank has revised its forecast to 165 from 155, ranking it among the most bearish forecasters surveyed by Bloomberg. The change reflects fiscal pressures in Japan, higher-for-longer US Treasury yields and only gradual rate hikes from the Bank of Japan, strategist Karen Reichgott Fishman wrote in a note.
This backdrop “strongly argues for continued depreciation pressure on the currency, despite its extreme undervaluation on our estimates,” she wrote.
Foreign-exchange options traders assign around a 76% chance that dollar-yen will rise to 165 by next June.
The yen was around 162.21 per dollar in Asia trading Monday, down 0.5% from the previous session.
Goldman also favors the yen as a funding currency for carry trades. The strategy involves borrowing yen to invest in higher-yielding assets such as emerging-market currencies.The firm sees dollar-yen trading at 162 in three months’ time, and at 163 in six months. It had previously expected the pair to trade at 160 and 158 over the same period.
Goldman says the effectiveness of official intervention to prop up the yen is likely to be short-lived. That’s especially the case if macro fundamentals continue to push in other directions, such as rate differentials that favor the dollar.
“The latest reports that the Ministry of Finance may end the warnings ahead of official operations may suppress volatility for some time again, but the underlying sources of yen weakness remain,” Fishman wrote.
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