Goldman Sachs: Current Yen Rally Is "Too Strong, Too Fast" Due to BOJ Policy Risks

Goldman Sachs believes that if the Bank of Japan leverages the recent strength of the yen and continues with a gradual rate hike path, the yen’s post-election rebound may be at risk. In a report led by strategist Kamakshya Trivedi, it was stated that although the yen may continue its upward momentum in the coming weeks, they tend to believe that this rally may have been too strong and too fast. If the Bank of Japan uses the yen’s recent appreciation to maintain a more gradual pace of rate hikes, the yen could return to a depreciation trend, and the long-term government bond yield curve may become volatile. “Meanwhile, we believe that the likelihood of large-scale capital inflows back into Japan in the short term remains low,” as Japanese portfolio data shows that a narrower interest rate spread or a steeper Japanese government bond yield curve would be needed to trigger such flows. The US dollar may continue to be weighed down by multiple factors: the instability of US policy-making, sell-offs in tech software stocks that could weaken the relative performance of US equities, and unique situations in Asia—all of which are driving the dollar lower. “This is especially important for investors focused on dollar valuation and betting on dollar weakness. The current overvaluation of the dollar is entirely due to the relative performance of Asian currencies.”

Editor: Wang Yongsheng