GS MORNING 1 JPY and Intervention Call Takeaways 2 FX Correlation Themes 3 Jan Hatzius’ Latest 4 Weekend Macro Call Key Quotes and 5 China Energy Deman

Highlights from GS Research, Sales, and Trading: 1) JPY & Intervention Call Takeaways, 2) FX Correlation Themes, 3) Jan Hatzius’ Latest, 4) Weekend Macro Call Key Quotes and 5) China Energy Demand

1) JPY & Intervention Zoom Takeaways

Takeaways from our Zoom yesterday on JPY & Intervention: whether this round, with US involvement, can change multi-year trend of JPY weakness.

Praneet Shah (Global Head of FX Options Trading): I think the most important difference between this round and previous rounds is the magnitude of it. On Thursday we estimate around $60bn worth of intervention, on Friday around $40bn, and even earlier yesterday in Asia another $10bn. So we estimate around $100-$110bn now across three days. If you compare that to April and May, on a given day, we weren't seeing anything more than about $25-$30bn, and that entire round was about $60bn. So, the magnitude is very different, and also the degree of coordination with the US. I'm taking this much more seriously, just given the magnitude of how much they're willing to put behind it and the coordination with the US. It feels like they're really going all in. I do think they're trying to get USDJPY below 158, which is the 200-day moving average. I think the cloud comes in at 158.50. There's also an element of not losing face, given the degree of coordination with the US. So short term, I think it's quite an asymmetric setup. I think 158 caps it out in the short term in USDJPY, and positioning just continues to get shorter JPY. I think you retest 155, my next level is 152.

Mike Cahill (Head of G10 FX Strategy): I think this doesn’t change the structural trend of a weaker JPY, on the medium-term view. If anything, the smaller market response relative to the size shows that the depreciation we've seen so far is basically in line with market and macro fundamentals and what Japan has laid out. So, what would really be required is a change in either that policy mix or the global growth picture. So, what policy mix would have to change? Probably not BOJ hikes. It's a relative game – you'd need the BOJ out-hiking what's priced into the market and out-doing what gets priced from the Fed. The shift in Fed expectations this year has been a big part of what's weighing on JPY, and it's going to be difficult for Japan to speed up enough to turn that around through monetary policy. Failing that, the most powerful lever they have is repatriation. Japan has a whole lot of international capital and bringing that back would strengthen JPY in a way Takaichi has talked about wanting. It seems like they're closer to that lever than we thought, but it's difficult to implement and comes with big trade-offs – you're asking Japanese investors to go into something less than optimal. It's tough to force or encourage repatriation successfully – to take a Japan-based investor from US equities into JGBs is a big step, and forcing it probably takes pretty draconian policy changes, unless there's a change in the macro.

George Cole (Head of European Rates Strategy): The central question: is this FX intervention a complement to monetary policy – i.e. policy shifts in a new way to establish a new equilibrium for the yen – or a substitute for further action, neutralizing at least temporarily some inflationary effect from JPY weakness? I don't think you can be fully definitive about which side the BOJ ends up on, but in market pricing terms, the market prices this as a complementary shift — that in order to make sure the intervention succeeds, having lived through April not really sticking, there's now a much larger chance of a shift in BOJ behaviour. That's the scenario priced. I think we have to be realistic that maybe the BOJ hasn't shifted its expectation for near-term meetings as much as the market expects – this is the view of our Japan Econ team, who'd also say incoming data might not meet the BOJ's own inflation forecast. So, we'd take the dovish side on the very front end, on the idea you're not going to meaningfully out-hike October pricing.

2) FX OPTIONS TRADING (EREL) – Correlation Themes Update – LINK

Following another volatile couple of weeks across markets, we explore a number of opportunities…