Goldman Sachs analyzes effective FX hedges in scenarios where both US equities and yields decline, highlighting the most reliable currency positions. Safe-havens JPY and CHF, along with shorts in MXN and AUD, are identified as effective hedges. However, the costs associated with certain strategies prompt a preference for shorts in AUD or GBP due to their favorable combination of responsiveness and lower carry.
Key Points:
Safe-Haven Currencies:
- Long positions in JPY and CHF emerge as the most effective hedges in scenarios involving declines in both US equities and yields.
Emerging Market and G10 Shorts:
- Shorts in MXN (Emerging Markets) and AUD (G10) are highlighted as effective hedges within the broader FX complex.
Preferred Hedges Across Scenarios:
- Short USD/JPY, USD/CHF, and long USD/MXN are considered the best hedges across multiple scenarios, demonstrating effectiveness regardless of oil price shifts.
Cost Considerations:
- While these strategies are effective, the elevated carry associated with them makes them relatively costly.
- As an alternative, shorts in AUD or GBP are favored for their reliable response to recessionary shocks, minimal dependence on oil prices, and low carry costs.
Conclusion:
Goldman Sachs identifies JPY and CHF longs, along with MXN and AUD shorts, as effective FX hedges in declining equity and yield scenarios. However, due to the high cost of certain hedging strategies, shorts in AUD or GBP are recommended for their cost-effectiveness and strong responsiveness to economic downturns
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