USD: Goldman Sachs See Renewed USD Downside Risks, Likes Short USD/JPY

The global bank weighs in on the USD outlook post Friday's jobs report, noting it re-asserts USD downside risks. It likes USD/JPY, see below for more details. 

Goldman Sachs: "USD: Whiplash week. For much of the week, our Dollar views were on the wrong side of market moves, but the substantial revisions to the employment situation should, in turn, revise the emerging narrative that the FX reaction to tariffs has changed again. On the tariff narrative, we see three key aspects to our view that the Deals should not derail Dollar downside. First, and most fundamentally, we expect that the US will bear most of the cost of the tariffs, which will weigh on its terms of trade. This is partly because of the breadth of the tariff increases, which will make it difficult for US firms and consumers to find suitable substitutes. This is where we disagree with the market and media narrative this week that individual deals were more negative for trading partners because of the disparity in tariff rates. Second, it is likely that a part of the Dollar’s depreciation in April stemmed from expected US underperformance—as the elevated occurrence of “sell America” days demonstrates—and arguably that has looked less compelling lately. This is where the NFP revisions are most important, as they change the picture from the labor market looking—in Chair Powell’s words—“quite solid” to now aligned with the softer growth data. Third, we and others noted that part of the Dollar’s decline was due to the back-and-forth nature of the implementation and hard-to-pin policy goals. Admittedly, this has changed somewhat—or at least has become less surprising—since the initial Liberation Day market response, and it is hard to make an exact attribution to each of these factors. But we think concerns over institutional governance will continue to weigh on the Dollar. And while rate cuts are not required for further Dollar downside, they obviously would still help. With the changing labor market landscape, we expect markets will price some likelihood of nearer, deeper and faster Fed cuts. That should be especially important for the Yen, which would benefit both from rising recession concerns and shifting hedging costs when the curve bull steepens, which is why we now recommend investors go short USD/JPY. While we acknowledge the difficult trading environment, we think the price and positioning cleanse this week offer compelling entries to re-engage on the Dollar downside thesis, and think the employment report supports this view."