Goldman Sachs Names One Trade to Hedge an AI Market Shock

Japan's policy shift appears to be making the yen less likely to slump when global yields climb, according to Goldman Sachs. The bank now sees the currency as an effective protection against an artificial intelligence (AI) market shock. The recommendation comes after a tech selloff pulled Japan's Nikkei 225 well below its record, with chip and AI-linked shares leading last week's losses in Tokyo.

Market Impact

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

Concurrently, the yen rose 0.9% against the dollar on October 22 as Treasury yields dropped, Bloomberg reported. On October 23, it touched its strongest level in more than a month.

Goldman's Strategy

Goldman's strategists argue the AI boom has left US stocks and the dollar exposed if growth weakens. They note that stocks and bond yields falling together historically favors the yen. The bank ties the yen's smaller reaction to rising yields to Japan's domestic policy settings.

Over a longer horizon, the strategists named one specific trade: "Short USD/JPY should be the most effective hedge against general growth wobbles or, specifically, a broad AI shock." However, for the near term, Goldman still sees the global backdrop favoring further yen weakness and prefers selling the euro against the yen.

Upcoming Tests

December rate decisions will test the bank's view. In a Bloomberg survey, 83% of economists expect the Bank of Japan (BOJ) to hike from 1.25% that month, while the Federal Reserve (Fed) is also expected to hike in December. Matching quarter-point moves would leave the US-Japan rate gap little changed, revealing whether the yen's weakness has truly eased.