The yen may be flirting with a near 24-year low but Goldman Sachs Group Inc. strategist Zach Pandl is happy to remain in a dwindling bullish camp on the currency.

The firm’s co-head of global FX, rates and EM strategy sees two broad scenarios for the yen to strengthen -- either soon in a US economic downturn or thanks to a central bank policy shift or intervention. The latter would come from inflation finally reigniting in Japan, because of high commodity prices, the weaker currency and the reopening of the economy.

“We see rising chances of a change in the policy mix in Japan -- in the form of FX intervention or a shift higher in the yield-curve control tolerance limit,” Pandl wrote in emailed comments. “The scenario where yen depreciates on a trend basis due to uniquely weak domestic inflation seems a relatively low probability outcome.”

In a note last month, Pandl’s colleague Karen Reichgott Fishman suggested a US recession could lead to a 15%-20% drop in the dollar-yen. The pair has jumped by about 17% this year.

Goldman Says Yen Shows Significant Value as a Recession Hedge

On Thursday, the yen was a whisker away from sliding to the lowest since 1998 as investors ramped up short bets on the currency. The Bank of Japan is keeping local yields capped under its yield-curve control program to boost a moribund economy while US equivalents climb on rising interest-rate expectations -- a divergence that favors the dollar.

In the short term, the path for the yen will depend on catalysts such as Friday’s US inflation report, and next week’s Federal Reserve and Bank of Japan meetings, according to Pandl.

Source:
courtesy of BLOOMBERG

by Cormac Mullen

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