Both ECB & BoJ Are 'Tricky' But We Have More Faith In BoJ - Goldman Sachs

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Old 06-08-2016, 09:30 AM
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Default Both ECB & BoJ Are 'Tricky' But We Have More Faith In BoJ - Goldman Sachs

Both ECB & BoJ Are 'Tricky' But We Have More Faith In BoJ - Goldman Sachs
07 Jun 2016 18:38 EDT

Robin Brooks, Silvia Ardagna and Michael Cahill
Goldman Sachs Macro Markets Strategy

Given how dovish the market is on the Fed interest rate futures price 60bp in tightening through 2017 we still see the big picture as Dollar-supportive, even with the slower pace of hikes our economists now forecast.

But the ECB and BoJ are tricky. Above all, monetary policy at the zero lower bound is an expectations game, where central banks need to surprise again and again to convince markets of their determination to raise inflation. The ECB has now disappointed markets twice, while the BoJ made a tactical error with its shift to negative rates. We therefore made a series of forecast revisions in a recent FX Views.

Ultimately, we have more faith that the BoJ will find ways to surprise on the dovish side, given that reflation is at the core of Abenomics. As a result, we continue to forecast substantial $/JPY upside, even on a near-term horizon. Recently, we revised our 3-, 6- and 12-month forecasts to 115, 120 and 125, respectively, from 122, 125 and 130 previously.

Our 24- and 36-month forecasts are also 130, down from 140 previously, in a nod to some of the progress the BoJ has made since 2012 in turning underlying inflation positive.

We are doubtful that the ECB will be able to ease in an effective manner near term and pare back our expectation for EUR/$ downside one year out. Our 3-, 6- and 12-month forecasts are now 1.12, 1.10 and 1.05 (from 1.04, 1.00 and 0.95 previously).However, we maintain our view that the Euro needs to fall a lot further in the medium term if the ECB wants to meet its inflation target.

Our 24-month forecast is 0.95 (from 0.90 previously) and our 36-month target is unchanged at 0.90.
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