Goldman Sachs Says Yen Shows Significant Value as A Recession Hedge

Summary:

The relentless selling of the yen looks to have come to an end and some green shoots of positive commentary are beginning to appear.

Goldman Sachs Group Inc. touted the currency as an ideal recession hedge and remarked on its 'significant value' in a note Tuesday. Scotiabank analysts made the case for a modest yen rebound in a report the same day.

The yen has been in freefall this year as the dovish Bank of Japan keeps local yields anchored to the floor while their Treasury equivalents surge on expectations for aggressive Federal Reserve rate hikes. It has fallen 12% against the dollar — the worst performance among Group-of-10 peers — with Japan's position as a commodity importer at a time of surging prices also weighing.

But the currency is now 20%-25% undervalued against the dollar and screens as the cheapest safe haven asset at a time when global recession risk is on the rise, according to Goldman strategist Karen Reichgott Fishman. Furthermore, dollar-yen has climbed to levels that imply greater odds of official intervention, she added.

A recession scenario could lead to a 15%-20% drop in the currency pair, she suggested.

"Over the short-term, amidst highly volatile global markets, the yen will likely be influenced by changes in Treasury yields and commodity prices," Fishman wrote. "At the same time, we expect the combination of cheap valuation, non-trivial risk of intervention, and, most importantly, rising odds of recession to open up paths to dollar-yen downside."

Fishman's more upbeat analysis on the prospects for the yen contrast with comments she made last month that government intervention would be unlikely to drive a 'sustained appreciation' in the currency.

The yen traded around the ¥130.40 level against the dollar Wednesday, not far off a 20-year low of ¥131.35 reached Monday. But the currency is little changed in May compared to recent months — it slumped over 6% in April and more than 5% in March.

While longer-term headwinds for the currency remain intact, the "bear trend" may be slowing, opening up the door for a modest reversal, wrote Scotiabank analysts Shaun Osborne and Juan Manuel Herrera.

"Basically, the yen is heavily oversold," they said.

Source: Bloomberg

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Goldman Sachs Says Yen Shows Significant Value as A Recession Hedge

Source: Bloomberg

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