Goldman Sachs said the yen is becoming a more effective hedge against artificial intelligence (AI)-driven market shocks, because changes in Japan's policy backdrop have reduced the risk of sharp yen depreciation when global yields rise. "While the global backdrop still suggests the yen may weaken further, the yen now appears to be a more attractive hedge for pro-cyclical portfolios than in recent years," strategists including Kamakshya Trivedi wrote in an October 23 report.
Earlier, during last week's global technology stock selloff, the yen once again displayed its traditional safe-haven characteristics. On Thursday, the yen rose 0.9% against the dollar, and on Friday it briefly touched its highest level in more than a month, as concerns about the AI investment boom drove stocks lower and triggered a sharp rally in U.S. Treasury prices. It then gave back some of those gains as U.S. Treasury yields stabilized.
Goldman Sachs believes the AI boom has made both U.S. stocks and the dollar particularly vulnerable to a deterioration in the economic growth outlook. If some kind of shock were to push both stocks 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.
Goldman Sachs said there are also 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, and strategists said this may reflect reduced depreciation pressure stemming from Japan's domestic policy environment. This stands in sharp contrast with 2022, when the Bank of Japan maintained its yield curve control policy even as global borrowing costs surged.
Goldman Sachs said this change 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 dollar against the yen, thereby strengthening the asymmetry of holding the yen as a hedge.
In the short term, Goldman Sachs continues to favor shorting the euro against the yen, 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 markets with a hawkish signal when it announces its policy decision on October 30. From a longer-term perspective, however, the strategists see dollar-yen trading as a more effective means of guarding against a deterioration in risk sentiment. "Shorting dollar-yen should be the most effective hedge against broad economic growth volatility, or specifically against a broad AI shock," they wrote.
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