The yen is becoming a more effective hedge against an artificial intelligence-driven market shock, as changes in Japan's policy backdrop reduce the risk of the currency weakening sharply when global yields rise, according to Goldman Sachs.
"The yen now looks like a more attractive hedge for procyclical portfolios than it has been over recent years, despite the global backdrop still arguing for further JPY weakness," strategists including Kamakshya Trivedi wrote in a note dated Oct. 23. The call follows the yen showing renewed traditional haven characteristics during last week's global tech stock rout. It surged 0.9% against the dollar Thursday and briefly reached its strongest level in more than a month Friday as concerns over the AI investment boom drove equities lower and sparked a sharp Treasury rally. The currency later pared some of those gains as US yields stabilized.
Goldman argues that the AI boom has left both US equities and the dollar particularly exposed to a deterioration in the growth outlook. A shock that pushes stocks and bond yields lower at the same time would create the market environment that has historically been most favorable for the yen. There are also early signs the currency is becoming less vulnerable when global yields rise. Yen weakness in response to rising yields has been more limited recently than over the past six to seven years, which the strategists said likely reflects reduced depreciation pressure from Japan's domestic policy settings. That contrasts with 2022, when the Bank of Japan maintained yield-curve control as global borrowing costs surged.
In the near term, Goldman continues to favor selling the euro against the yen, citing little obvious domestic catalyst for significant yen appreciation and a high bar for the BOJ to surprise markets at its Oct. 30 policy decision. Over a longer horizon, however, the strategists see the dollar-yen trade as the more effective protection against a deterioration in risk sentiment. "Short USD/JPY should be the most effective hedge against general growth wobbles or, specifically, a broad AI shock," they wrote.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing