Goldman Sachs: The yen has regained its "safe-haven king" status, becoming the most effective tool for hedging against AI market shocks.

Goldman Sachs: The yen has regained its "safe-haven king" status, becoming the most effective tool for hedging against AI market shocks. Goldman Sachs says the yen is becoming a more effective tool for hedging against AI-driven market shocks, because changes in Japan's policy environment have reduced the risk of a sharp yen weakening when global yields rise. Strategists including Kamakshya Trivedi wrote in an October 23 report: "Although the global backdrop still supports further yen weakness, the yen now looks like a more attractive hedge within pro-cyclical portfolios than it has in recent years." The judgment was made after the yen once again showed its traditional safe-haven characteristics during last week's global tech stock selloff. On Thursday last week, the yen rose 0.9% against the dollar and on Friday briefly touched its strongest level in more than a month, as concerns about the AI investment boom dragged equities lower and triggered a sharp rally in U.S. Treasuries. Subsequently, as U.S. Treasury yields stabilized, the yen gave back some of its gains. Goldman Sachs believes the AI boom has made U.S. equities and the dollar particularly sensitive to deteriorating growth prospects. If a shock simultaneously pushes down stocks and bond yields, it would create the kind of market environment that has historically been most favorable for the yen. Goldman Sachs also said there are preliminary signs that the yen's vulnerability when global yields rise is decreasing. Recently, the yen's weakening response to rising yields has been more limited than over the past six to seven years. The strategists believe this likely reflects reduced depreciation pressure from Japan's domestic policy environment. This contrasts sharply with 2022, when the Bank of Japan maintained yield curve control (YCC) while global borrowing costs soared. The change in this relationship means that even if carry trades remain negative-yielding, the yen "should be a less painful hedge to hold." A more constructive domestic policy environment, the yen's undervalued valuation, and rising risks of currency intervention are also jointly limiting the potential upside for USD/JPY, thereby improving the asymmetry of holding the yen as a hedging tool. In the short term, Goldman Sachs continues to favor shorting EUR/JPY, citing that there are few obvious domestic catalysts to drive a sharp yen appreciation, and that the bar is high for the Bank of Japan to surprise the market with a hawkish message at its October 30 policy decision. However, over a longer horizon, the strategists view USD/JPY trades as more effective protection against deteriorating risk sentiment. They wrote: "Shorting USD/JPY should be the most effective tool for hedging overall growth volatility, especially a broad AI shock."