Goldman sees yen weakness as BOJ moves toward increased stimulus

[SINGAPORE] At Goldman Sachs Group Inc, currency strategists say it's not just about the Federal Reserve.

The Bank of Japan, which meets Tuesday, is on course to boost monetary stimulus, weakening the yen to 130 versus the dollar within 12 months, Goldman Sachs analysts, including Robin Brooks, the chief currency strategist in New York, wrote in a report. While Goldman sees further easing coming in October, two of 35 analysts surveyed by Bloomberg News forecast further stimulus at Tuesday's gathering. The euro, meanwhile, will decline to 95 cents per dollar next year as the European Central Bank expands its asset-buying program, the analysts wrote.

After the two currencies rallied last month amid a China- inspired global market rout, investors have an opportunity to sell the currencies, they wrote. The yen has gained 6.9 per cent during the past three months, the most among 10 developed-nation peers, while the European counterpart has appreciated 4.3 per cent, Bloomberg Correlation-Weighted Indexes show.

"Risk aversion has increasingly decoupled price action from fundamentals in recent weeks, which presents an opportunity," the analysts wrote.

The yen added 0.4 per cent to 120.16 per dollar at 9:41 am in New York, while the euro lost 0.3 per cent to $1.1309.

Japan's currency is projected fall to 127 per dollar by the end of 2016, according to a Bloomberg survey of analysts. The euro will weaken to $105, a separate survey shows.

Foreign-exchange traders have focused in recent weeks on the potential for the first US interest-rate increase since 2006.

The Fed will likely keep interest rates unchanged on Thursday and signal that "liftoff is near," the analysts wrote. There is a risk that there will be a "dovish shift in the projections and, potentially, in the language" from Fed Chair Janet Yellen during the press conference, according to the report.

Liberal Democratic Party lawmaker Kozo Yamamoto, who has advised Prime Minister Shinzo Abe on economic policy, said last week the BOJ should increase annual asset purchases by at least 10 trillion yen (US$83 billion). The central bank's Oct 30 meeting would be a "good opportunity" for further easing, he said in an interview with Bloomberg.

"We see dollar-yen upside as highly actionable on a three- month horizon," the Goldman Sachs analysts wrote. "Governor Kuroda has been adept at surprising markets since the start of his tenure and, though our official call is for the second October meeting, we cannot rule out action sooner." ECB President Mario Draghi signaled his willingness to boost stimulus when policy makers met earlier this month. Officials are battling slower growth and inflation.

More than two-thirds of respondents to a Bloomberg survey predicted the ECB will expand or extend its quantitative-easing program, with almost all of those saying he'll do so within nine months.

BLOOMBERG