Goldman Sachs: Stronger Case for Yen as Hedge Against AI-Driven Market Shocks

According to a report from Goldman Sachs, the Japanese yen is becoming a more effective hedge against artificial intelligence (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 while the global backdrop still suggests the yen could weaken further, the currency now appears to be a more attractive hedge for pro-cyclical portfolios compared with recent years.

During last week's global tech stock selloff, the yen once again displayed its traditional safe-haven characteristics, rising 0.9% against the US dollar on Thursday and briefly touching its highest level in more than a month on Friday.

Goldman Sachs believes the AI boom has made US equities and the US dollar particularly vulnerable to a deterioration in the growth outlook. If a shock were to push both stock prices and bond yields 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 fragile when global yields rise. Recently, the yen's depreciation response to rising yields has been more limited than over the past six to seven years, which strategists say may reflect reduced depreciation pressure stemming from Japan's domestic policy environment.

This stands in sharp contrast to 2022, when the Bank of Japan maintained its yield curve control policy even as global borrowing costs surged.

Goldman Sachs said this shift in the relationship means the yen should be a less painful hedging tool, even if carry remains negative.

A more proactive domestic policy environment, the yen's low valuation and high risks of currency intervention are also limiting the potential upside for the US dollar against the yen, thereby enhancing the asymmetry of holding the yen as a hedge.

In the near term, Goldman Sachs continues to favor shorting the euro against the yen, saying there is a lack of obvious domestic catalysts for a sharp yen appreciation and that the bar is high for the Bank of Japan to surprise the market with hawkish signals at its October 30 policy decision.

From a longer-term perspective, however, trading the US dollar against the yen should be a more effective means of guarding against a deterioration in risk sentiment. Shorting the US dollar against the yen should be the most effective hedge against overall economic growth volatility or, more specifically, against broad AI-related shocks.