Goldman says this FX trade is the best hedge for the AI drawdown

 Goldman Sachs said a short position in the dollar against the Japanese yen is the best foreign exchange hedge against a drawdown in the AI trade, particularly as the market has already priced in a strong link between falling equities and falling yields.

"Short USDJPY is, in our view, the best hedge in FX for a drawdown in the AI trade," Goldman said, adding that the case is stronger because implied correlation for equities down and yields down "has already repriced aggressively." 

The bank said the yen is the standout long when equities and interest rates fall together. To test this, it examined the 20 largest "twin drawdowns," periods when both stocks and bond yields fell, since 2000, and compared how groups of currency pairs performed in each episode.

The yen cluster came out on top as the preferred long in such an environment, Goldman said, and the yen also stood out against the dollar.

The dollar retreated Wednesday but was off its earlier lows after Democrats’ sweeping victory in the U.S. midterm elections removed a source of uncertainty for markets, while investors weighed the potential for regulatory changes.

Democrats seized control of both the Senate and House on Tuesday, winning in some Republican strongholds for the first time in generations as voters delivered a sharp rebuke to President Donald Trump.

The outsized win eased concerns about contested results, though it raises the prospect of divided government and legislative gridlock between a Republican White House and a Democratic Congress. The U.S. is also grappling with the Iran war and an AI boom that has fueled both economic growth and inflation.