Overview
Goldman Sachs has concluded that taking a short position in the U.S. dollar against the Japanese yen - effectively going long the yen - is the strongest foreign exchange hedge for a potential drawdown in the AI trade. The bank's view rests on empirical testing of historical episodes in which equity markets and bond yields fell together, and on market pricing that already reflects a tightened link between falling stocks and lower yields.
Goldman's analysis
The bank stated that a short USD/JPY is, in its view, "the best hedge in FX for a drawdown in the AI trade," noting the recommendation is reinforced because implied correlation for equities down and yields down "has already repriced aggressively." To assess the relationship, Goldman examined the 20 largest "twin drawdowns" - periods since 2000 when both stocks and bond yields declined - and compared how different groups of currency pairs behaved in each episode.
In that historical test, the group of yen crosses emerged as the preferred long position in such environments, and the yen also performed particularly strongly against the dollar. That led the bank to single out the yen as the standout long when equities and interest rates fall together.
Market context and immediate reaction
The dollar pulled back on Wednesday but remained off earlier lows following Democrats' decisive midterm election victories. According to the account of market moves, Democratic control of both the Senate and House removed a source of uncertainty for markets, while investors considered the implications of potential regulatory change. The party's success included wins in some Republican strongholds for the first time in generations, described as a sharp rebuke to President Donald Trump.
Goldman noted that the market's adjustment eased concerns about contested results, but also highlighted that the outcome increases the likelihood of divided government and legislative gridlock between a Republican White House and a Democratic Congress. The U.S. is concurrently managing other major factors including the Iran war and an AI expansion that has driven both economic growth and inflation.
Implications for traders and markets
Based on its historical testing, Goldman suggests traders should view short USD/JPY as a primary FX hedge in scenarios where the AI-driven rally reverses and both equities and yields fall. The bank's recommendation is grounded in observed currency behavior during simultaneous declines in stocks and bond yields and in the current market pricing of implied correlations.
Note on scope
This article summarizes Goldman Sachs' stated view and the testing it described regarding currency performance during past episodes of concurrent equity and yield declines. It does not introduce additional data or analysis beyond what the bank reported.