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Jun 13 - 12:55 PM

Goldman Sachs: FX Hedging Remains Attractive for US Investors Ahead of the US Presidential Election

By eFXdata  —  Jun 13 - 10:45 AM

Synopsis:

Goldman Sachs suggests that low FX volatility could rise due to potential geopolitical risks, the upcoming US election, or economic concerns, making it a good time for US investors to consider reducing currency exposure in global portfolios. They outline a framework for FX hedging decisions and recommend hedging non-US equity exposure, particularly in Japan.

Key Points:

  1. Potential Increase in FX Volatility:

    • FX volatility could increase if geopolitical risks, the US election, or economic issues materialize.
    • This scenario makes it a prudent time to reduce currency exposure in global portfolios.
  2. Framework for FX Hedging Decisions:

    • Goldman Sachs' framework for FX hedging includes four considerations:
      • Portfolio Asset Composition: Assessing the types of assets in the portfolio.
      • Relative Safety of the Foreign Currency: Evaluating the stability of the foreign currency.
      • Level of Carry: Considering the interest rate differentials.
      • Odds of Recession: Estimating the likelihood of a recession over the investment horizon.
  3. Recommendation for US Investors:

    • In Q4 2023, the framework indicated that US institutions should hedge non-US equity exposure, especially in Japan, due to the elevated level of USD carry and a resilient US economy.
    • The current backdrop remains similar, reinforcing the advice for US investors to reduce FX exposure on a broader basis ahead of the US presidential election.

Conclusion:

Goldman Sachs advises US investors to consider FX hedging, given the potential for increased volatility due to geopolitical risks, the US election, and economic uncertainties. Their framework for FX hedging supports reducing currency exposure, particularly for non-US equity holdings, with a strong emphasis on Japanese assets.

Source:
Goldman Sachs Research/Market Commentary

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