Goldman: Possible 15-20% Upside Vs USD In Recession Scenario

Goldman Sachs note that “going into last week, USD/JPY was still hovering around the Y130 level despite volatile markets and rising global recession concerns. We had been arguing that we see a number of paths to JPY appreciation, particularly due to its ranking as the most effective recession hedge, and its latest performance reinforces our view. Not only does the JPY tend to outperform in a “risk down, U.S. rates down” scenario, typically consistent with recessionary pricing, but it also has the attributes of a natural “haven”. Most importantly, Japan is a wealthy nation with a large stock of foreign assets - as we outlined in more detail in a recent Financial Times op-ed. At the same time, our preferred metrics of fair value suggest that the JPY is trading at historically weak levels on the order of 20-25% undervalued against the USD. So how much JPY appreciation could investors see in a recession scenario? Our recent analysis suggests possible USD/JPY downside of 15-20% in such an outcome, given the various model estimates and asymmetry created by valuation. Over the short-term, amidst highly volatile global markets, the JPY will likely be influenced by changes in Treasury yields and commodity prices. But we believe that cheap valuations and rising odds of recession argue for a more constructive view over the next year and think investors should consider longer-dated JPY calls to protect portfolios.”