AI Shock? Goldman’s Hedge Is the Yen, Not a Coin

Goldman Sachs said short USD/JPY should hedge a broad artificial intelligence (AI) market shock. “Short USD/JPY should be the most effective hedge against general growth wobbles or, specifically, a broad AI shock,” the bank’s strategists wrote. The note followed last week’s tech selloff, when chip and AI-linked shares led losses in Tokyo.

The selloff pulled Japan’s Nikkei 225 well below its record. The index closed at 62,693.16 on October 23, according to Nikkei data, leaving it about 14% below its record close of 73,007. On October 22, the Nikkei fell 2.65% from the previous close to its lowest finish since July 30, while the Tokyo Stock Price Index (TOPIX) lost 1.14% that day. Overall, the index has lost 5.2% in the past month.

The yen rose 0.9% against the dollar on October 22 as Treasury yields dropped, Bloomberg reported, and on October 23 it touched its strongest level in more than a month. Goldman ties the yen’s smaller reaction to rising yields to Japan’s domestic policy settings. “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,” the strategists wrote.

Goldman argues that the AI boom has left US stocks and the dollar exposed if growth weakens, while stocks and bond yields falling together has historically favored the yen. Over a longer horizon, the strategists named short USD/JPY as the trade, but in the near term they still see the global backdrop favoring further yen weakness and prefer selling the euro against the yen for now.

December rate decisions will test Goldman’s view. In a Bloomberg survey, 83% of economists expect the Bank of Japan (BOJ) to hike from 1.25% that month, and the Federal Reserve (Fed) is also expected to hike in December. Matching quarter-point moves would leave the US-Japan rate gap little changed. The yen’s response to rising US yields would show whether its weakness has truly eased, while this week’s Fed and BOJ decisions offer an early test of the hedge for investors heavy in US tech.