Goldman Sachs: Yen's hedging value rises, can cushion market shocks triggered by AI

GMTEight APP has learned that Goldman Sachs released a report stating that the yen is becoming a more effective hedge against AI-driven market shocks, as changes in Japan's policy backdrop reduce the risk of sharp yen depreciation when global yields rise. Goldman Sachs said that although the global backdrop still suggests the yen may weaken further, compared with recent years, the yen now appears to have become a more attractive hedge for pro-cyclical portfolios. During last week's global tech stock selloff, the yen once again showed its traditional safe-haven currency characteristics, rising 0.9% against the dollar on Thursday last week and at one point touching its highest level in more than a month on Friday. Goldman Sachs believes that the AI boom has made U.S. stocks and the dollar particularly vulnerable to a deterioration in the economic growth outlook. If some kind of shock causes both stock prices and bond yields to move lower at the same time, it would create the kind of market environment that has historically been most favorable for the yen. In addition, there are early signs that the yen is becoming less vulnerable when global yields rise. Recently, the yen's depreciation response to rising yields has been more limited than over the past 6 to 7 years, and strategists said this may reflect somewhat reduced depreciation pressure from Japan's domestic policy environment. This stands in sharp contrast to 2022, when the Bank of Japan maintained its yield curve control policy while global borrowing costs soared. Goldman Sachs said that the change in this relationship means the yen should be a less painful hedge, even if carry remains negative. A more active domestic policy environment, the yen's low valuation, and the high risk of currency intervention are also limiting the potential upside for USD/JPY, thereby enhancing the asymmetry of holding the yen as a hedge. In the short term, Goldman Sachs continues to favor shorting EUR/JPY, saying there is a lack of an obvious domestic catalyst for a sharp yen appreciation, and that the bar is high for the Bank of Japan to surprise the market with hawkish signals when it releases its policy decision on October 30. However, from a longer-term perspective, USD/JPY trading should be a more effective means of guarding against a deterioration in risk sentiment. Shorting USD/JPY should be the most effective hedge against overall economic growth volatility, or specifically against a broad AI shock.