More FX hedging chat, this time it's good for the yen

MORE FX HEDGING CHAT, THIS TIME IT'S GOOD FOR THE YEN

The weak non farm payrolls data got everyone excited on Friday, and Goldman analysts in their weekly FX note, reckon it'll be particularly beneficial for the Japanese yen, which they see strengthening to 142 per dollar from the current 147.7. USDJPY

Reasons include the cost of hedging FX risk - a subject that has seen more pixels spilled than most this year.

Goldman say if the Fed starts cutting again and the BOJ continues with gradual hikes, then Japanese investors should see the greatest reduction in hedging costs across the G10.

That should reduce current high hedging costs, leading to more hedging, "and likely serve as a tailwind for the yen".

A rise in hedging FX risk by Europe-based investors was one of the reasons for the euro's appreciation in the first half of the year.

As well as that, Goldman say, recent appreciation by China's yuan USDCNH could see scope for other Asian FX to catch up, and that the yen is an attractive hedge for risks related to Fed independence.

Challenges to this expectation of yen strength are a renewed rally in equities or what happens if Japanese Prime Minister Ishiba resigns, but Goldman say: "we expect flows to play a dominating role as they did in H1, and the yen should be a bigger participant this time around, in a backdrop of Fed cuts and lingering downside risks to growth. "

(Alun John)

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