Goldman favors yen to hedge against volatility

by Ruth Carson and Anya Andrianova

Goldman Sachs Group Inc. expects the yen to climb to the low 140 levels against the dollar this year as jitters around US growth and trade tariffs bolster demand for the safest assets.

The yen offers investors the best currency hedge should the chances of a US recession increase, said Kamakshya Trivedi, head of global foreign exchange, interest rates and emerging market strategy. A move to 140 would imply a gain of 7% from the current level, and the bank’s forecast is more bullish than the year-end median estimate of 145 in a Bloomberg survey of analysts.

“The yen tends to do best when US real rates and US equities are falling together,” Trivedi said in an interview in New York. Japan’s currency “screens as a more attractive hedge for the downside view on US growth than it has done for some time.”

Goldman’s call comes as President Donald Trump prepares to unveil sweeping tariffs on Wednesday — a move that Morgan Stanley and former Federal Reserve officials have warned may dent growth in the world’s largest economy. But there’s little consensus on which assets will fare well as the global trade war heats up, with hedge funds still holding to bets that the yen will decline from current levels.

Goldman’s economists recently revised their US policy forecasts to three interest-rate cuts this year from two on expectations that Trump’s tariffs will weigh on the economy. The bank also slashed its S&P 500 target again, citing concerns around growth and tariffs.

While levies are a risk, Trivedi sees US economic data such as the payroll number on Friday as a bigger driver for the greenback. Recent moves back his view: the yen strengthened after US jobs opening figures on Tuesday added to evidence that the employment market is gradually cooling. 

“If the US labor market data surprises on the weak side, that is going to be a much more important focal point for FX market investors and generally global market investors who are very focused on the US growth outlook,” he said. “And for that concern, the yen is a very good hedge.”

But, there are risks to the trade. Japan’s currency has depreciated over the past four years due to the nation’s yawning interest-rate gap with the US and tumbled to 161.95 in July, the weakest since 1986.

Hedge funds have trimmed their bearish positions on the yen this year, but remain overall short on the currency. Apart from a few brief bouts, speculators have been betting on the Japanese currency to weaken since early 2021. 

WHAT BLOOMBERG STRATEGISTS SAY...

Dollar-yen’s downward path will be driven by narrowing yield spreads with Treasuries after the Bank of Japan announced it will reduce purchases of long-end bonds in the next quarter.

Mark Cranfield, MLive strategist

Around this time last year, Trivedi and his team forecast dollar-yen would trade around 155, 150 and 145 over a three-, six- and 12-month period. The yen weakened past the 155 level last April and was trading around the 150 mark on Wednesday.

“The yen has room to appreciate in this less benign scenario where we and the market are increasing the probability of recession,” he said.

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