Yen becoming more favorable hedge against AI market shock, says Goldman Sachs

Goldman Sachs believes the Japanese yen is becoming an increasingly attractive hedge against potential shocks to the artificial intelligence-driven market. The yen now appears to be a more appealing option for investors with procyclical portfolios, despite global signals still favoring a weaker Yen, according to strategists from the investment bank.

This shift comes after the yen demonstrated its traditional safe-haven qualities during the recent global technology stock decline. The currency rose 0.9% against the dollar on Thursday, reaching its strongest level in over a month on Friday, as fears surrounding the AI investment surge pressured equities and sparked a sharp rally in U.S. Treasury bonds.

The yen's strength was short-lived, however, as U.S. yields stabilized. The investment bank argues that the AI boom has made both U.S. equities and the dollar particularly vulnerable to a downturn in the growth outlook. A simultaneous decline in stocks and bond yields would create a market environment historically most favorable for the yen.

Moreover, recent signs suggest the currency is becoming less susceptible to weakening when global yields rise, possibly due to reduced depreciation pressure from Japan's domestic policy settings. This is a departure from 2022, when the Bank of Japan maintained its yield-curve control approach amid surging global borrowing costs.

A more favorable domestic policy backdrop, the yen's relatively cheap valuation, and the possibility of currency intervention all contribute to reducing the potential upside in the dollar-yen pair, enhancing the asymmetry of holding the Japanese currency as a hedge. In the short term, Goldman Sachs continues to recommend selling the euro against the yen, as there appears to be little domestic catalyst for significant yen appreciation and the Bank of Japan's policy stance remains uncertain when it releases its decision on October 30.

In the longer term, however, the strategists consider selling the dollar against the yen to be the most effective protection against a deterioration in risk sentiment.