Synopsis:

Goldman Sachs reiterates that short USD/JPY positions remain one of the most reliable FX hedges against growing recession fears, despite some recent inconsistencies during market volatility. They forecast further Yen strength and see downside risks materializing sooner than expected.

Key Points:

• Short USD/JPY Still Works as a Recession Hedge:

  • Historically, short USD/JPY has been one of the most effective trades against rising recession fears.

  • Even with volatility, the Yen generally strengthened during recent risk-off episodes.

• Higher Yields a Temporary Distortion:

  • In late March, USD/JPY rose temporarily amid higher US yields, despite weaker equities, disrupting the typical correlation.

  • However, recent shifting correlations and institutional risk concerns suggest that yields are now less of an obstacle to Yen strength.

• BoJ Policy Shifts Not a Major Barrier:

  • Even if the BoJ adopts a more dovish stance next week, Goldman Sachs believes it won't meaningfully weaken the Yen, given the broader macro environment.

• Long-Term Dollar Overvaluation Unwinding:

  • Goldman expects the Dollar’s multi-year overvaluation to unwind, potentially moving into undervaluation, amplifying JPY gains.

• Forecast:

  • USD/JPY is expected to fall to 135 over the next 12 months, with risks skewed toward reaching—or falling below—that level even earlier.

Conclusion:

Despite near-term noise, Goldman Sachs maintains that short USD/JPY remains an effective recession hedge, supported by the Dollar’s valuation correction and persistent risk-off forces. They forecast a steady decline toward 135, with potential for even faster downside.