Goldman Sachs says the Japanese yen is the ‘ideal hedge’ against a US recession given its weakness against the dollar
Goldman Sachs believes the Japanese yen is an ideal hedge against the risk of a US recession, which the investment bank believes is a possibility within the next two years.
In a research note released Tuesday, Goldman analysts, led by Karen Reichgott Fishman, noted that the yen is trading at “extremely cheap levels” and is undervalued against the dollar by 20 to 25%. %.
“In other words, the yen is now trading at historic lows and is by far the cheapest safe-haven asset at a time when the risk of a global recession is rising,” Fishman wrote.
Fishman said the yen looked particularly cheap compared to other traditional safe-haven currencies such as the US dollar or Swiss franc.
The yen plunged against the dollar and hit a 20-year low last week, in part due to the widening gap between US and Japanese interest rates, as the Bank of Japan left its policy monetary policy unchanged, while the Federal Reserve is in an aggressive policy. tightening cycle to fight inflation, which is reaching 40-year highs.
The BoJ meanwhile has pledged to cap the yield on the country’s 10-year government bonds at 0.25%, while 10-year Treasuries are currently yielding more than 3%, the biggest difference between both since the end of 2018.
Fishman said the situation has “opened up significant value” for the yen as a hedge against what the bank estimates is a 35% chance of a US recession over the next 24 months. “Our latest work on currency hedging for key risk scenarios shows that the yen is the most effective hedge against a ‘falling risk, falling US rates’ shock or a market backdrop consistent with recessionary prices. ”
However, a rise in the dollar-yen will likely call for intervention, Fishman noted, especially at a time when commodity prices, such as energy, are soaring in the wake of foreign sanctions from Russia’s war with Russia. Ukraine. “In the short term, against the backdrop of highly volatile global markets, the yen will likely be influenced by changes in Treasury yields and commodity prices,” she said.
Given Japan’s dependence on energy imports in particular, which are priced in dollars, the extreme weakness of the yen means there is a greater chance that the central bank will intervene to support the currency and avoid a further rise. higher than inflation.
“The combination of cheap valuation, non-negligible intervention risk and, most importantly, a growing likelihood of recession to pave the way for the dollar to fall against the yen,” she said. stated, referring to the yen’s potential to strengthen against the dollar.
“cheap valuation, non-negligible intervention risk and, above all, a growing probability of recession” will lead to a lower dollar against the yen, which means a greater opportunity to sell dollar and buy dollar. yen.
“Cheap valuation and rising recession probabilities argue for a more constructive view of the yen over the next year,” Fishman said.