高盛-全球外汇展望-在美元的世界生存

10November2023|5:10PMGMT

2024GlobalFXOutlook

LivinginaDollarWorld

nInour2023Outlook,weacknowledgedmanyreasonsfortheDollarto

depreciate—mostnotably,itsloftyvaluationandarelativelybenignglobalgrowthoutlook—butarguedthattheDollar’sdepreciationfromthepeakwouldbe

relativelyshallowbecausewewerestill“WaitingforaChallenger”;fortheDollartogodown,itwouldrequirebettercapitalreturnprospectsabroad,especiallyinthemajorcurrencies.Now,aswelookaheadto2024,wefindourselvesinmuchthesameplace.TheDollarisstillhighlyvalued,andweexpecttheglobal

economytobereturningtoabetterbalanceoverthecomingyear,whichshouldweighontheDollarovertime.

nBut,acrossthemajors,oureconomistsaremostaboveconsensusonUS

growth,andhigheryieldsshouldprovideahighbartobeatfortotalreturn

prospects.Thisshouldatleastlimit(ifnotpreventaltogether)theprospectfor

reversingthecapitalflowsthathavehelpedtheDollarsustainitshighvaluationoverthelastdecade.TheriskstoourviewmostlyleantowardsaDollarthatis

even“strongerforlonger”ifitturnsoutthatothereconomiescannothandlethelevelofrestrictionthattheUSrequires.EmergingMarketcurrencieshavealsoalreadyappreciatedsubstantiallyagainsttherestoftheG10,sovaluationsare

nowmorechallengingonatrade-weightedbasis,andmuchoftheprospectforoutsizedreturnsfromheredependcriticallyontheDollaritself.Overall,ourviewisthattheDollar’sstrengthwillnoterodequicklyoreasily.

KamakshyaTrivedi

+44(20)7051-4005|

kamakshya.trivedi@

GoldmanSachsInternational

DannySuwanapruti

+65-6889-1987|

danny.suwanapruti@

GoldmanSachs(Singapore)Pte

8l|

michael.e.cahill@

GoldmanSachsInternational

KarenReichgottFishman

+1(212)855-6006|

karen.fishman@

GoldmanSachs&Co.LLC

TeresaAlves

+44(20)7051-7566|

teresa.alves@

GoldmanSachsInternational

IsabellaRosenberg

+1(212)357-7628|

isabella.rosenberg@

GoldmanSachs&Co.LLC

LexiKanter

+1(212)855-9701|

alexandra.kanter@

GoldmanSachs&Co.LLC

LivinginaDollarWorld

USD:FindingaBetterBalance

StayingStrong,StayingShallow

Ourheadlineviewin2023wasthattherewouldbeonly“shallow”Dollar

depreciationafterthepeak.Ourresearchsuggeststhatthisistypicalforpriorpeaks

whenresourceslackisstilllimited,somonetarypolicyisstillsomewhatconstrained

Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.ForRegAC

certificationandotherimportantdisclosures,seetheDisclosureAppendix,orgoto

/research/hedge.html.

2024GlobalFXOutlook

GoldmanSachs

andcannotquicklypivottoamoreaccommodativestancethattypicallyweighsontheDollar.Wearestickingwithourviewthatdepreciationfromthelate-2022peakwillbe

shallowandbumpy,andweexpectanotheryearofarelativelyresilientDollar.Even

thoughtheDollarisstillhighly-valuedonatrade-weightedbasis,weexpectonlymodestdepreciationoverthecomingyear.

Whiletheeconomyismovingintobetterbalance,stronggrowthandabove-target

inflationmeanthatwearelikelystillalongwayofffromeasierUSmonetarypolicy.ThattendstobethemarkerforsharperDollardepreciationcycles.Wethereforeexpect

somethingmoreakintothehigh-inflationDollarcycleinthe1970s,orthemodest

DotcomExceptionalismcorrectionoftheearly2000s,ratherthanthesharpdepreciationthatfollowedthePlazaAccordorFinancialCrisispeaks(

Exhibit1

,left).And,our

economists’above-consensusgrowthoutlookisparticularlyheavilyweightedtowards

theUS,whilewearemorecloselyalignedwithconsensusontheEuroareaandChina.EveninJapan,whereweexpectpolicytomoveinatighterdirection,thespread-outexitfromYieldCurveControlandNegative-Interest-RatePolicyisunlikelytobeenoughto

strengthentheYeninthenearterm.Thatmeanswestillexpectthemain“Challengers”tostruggletocompete,leavingroomformoredifferentiatedDollarreturns,butonly

limiteddownsideonatrade-weightedbasis(

Exhibit1

,right).

Exhibit1:Weexpectashallow,differentiateddeclinefromthe2022Dollarpeak

Percentchangerelativetopeak

RealBroadDollarTWI

Percentchangerelativeto

peak

5

0

-5

-10

-15

-20

-25

Mar-85

Apr-20

GSForecasts

Feb-02

Oct-22

Mar-09

Jan-74

Dec-16

024681012141618202224MonthsRelativetoDollarPeak

5

0

-5

-10

-15

-20

-25

PercentChange

PercentChange

USDReturnsSinceStartof2023

20

15

10

5

0

-5

-10

-15

(BarWidthProportionaltoTWIWeight)

JPY

MYR

AUD

CNYTWD

SGD

KRW

THB

CAD

GSUSDTWI

INR

EUR

GBP

CHF

BRL

MXN

20

15

10

5

0

-5

-10

-15

Source:Bloomberg,GoldmanSachsGlobalInvestmentResearch

ComefortheKing

USoutperformanceisanimportantimpedimenttomoresubstantialDollardownside,inourview.Whiletherehasbeenwidespreadtalkof“de-Dollarization,”privateinvestors

haveactuallybeendoingtheopposite.Overthecourseofthepastdecade,intheeraoflow(ornegative)ratesandrelativeUSoutperformance,theUSeconomysawasteadystreamofportfolioinflowsfromabroad.Foreigninvestorssoughttherelativesafetyandyieldofsafe-havenassetssuchasUSTreasuries,aswellaslong-termreturnsviaUS

FDI.Theseinflows,combinedwiththestrongrelativemarketperformanceofUSassets,haveresultedinasharpriseintheshareofUSassetsinglobalportfolios(

Exhibit2

,left).

10November20232

2024GlobalFXOutlook

GoldmanSachs

IndexBillionsofdollars

AnnualForeignPurchasesofUS

Equities(right)

122

RealDMDollarTWI800

117

112600

107

400

102

97200

92

0

87

82-200

19901992199419961998200020022004

1271000

WefindthattheDollar’shighvaluationovermuchofthelastdecadeistheresultofsuperiorrisk-adjustedreturnsandcapitalinflowsfromabroad,especiallyEuropeandJapan.ThisunderscoresourviewthatsubstantialDollardownsidewillrequirebettercapitalreturnprospectsabroad.ButourforecastofhigherUSyields,andpotential

tailwindsfromGenerativeAIinvestments,carrysomesimilaritiestothelate1990scycle,whenforeigninvestmentsintoUSequitieshelpedboosttheDollar(

Exhibit2,

right).Alltold,theresilientcyclicalpictureintheUSandthelackofclearchallengersabroadsuggestabumpypathonashallowDollardepreciationtrajectory,inourview.WiththeDollar’shighvaluationovermuchofthelastdecadeowingtosuperior

risk-adjustedreturnsthathaveattractedportfolioflowsfromotherDMeconomies,wethinktheendoftheDollar’scyclicalrunwillrequirebettercapitalreturnsabroad.

Exhibit2:USExceptionalismcouldcontributetoastrongerDollar

%

28

26

24

22

20

18

16

14

%

28

USAssetsasShareofGlobalPortfolioInvestmentAssets

26

24

22

20

18

16

14

010305070911131517192123

Source:IMF,FederalReserveBoard,GoldmanSachsGlobalInvestmentResearch

TheRiskofResilience

Ourforecastsforrobust,trend-paceUSgrowthwithinflationgraduallydeclining

towardstargetsuggestthatanon-holdFedwithratesthatremainhigherforlongerisanappropriatepolicystance.Butashasbeenrepeatedlyevidentoverthepastdecade,

whatmaybeappropriatefortheUSmaynotbeastableequilibriumfortherestoftheworld.Higherlong-termUSratesarealreadyexposingdormantfaultlinesacrosstheworld,aswehighlightedinourMarketsOutlook.

ThisisespeciallyimportantfortheFXoutlookasitraisesagrowingriskofpolicy

divergencenextyear.Aswehavehighlighted,thereareimportantdifferencesinthe

sensitivityofeconomiestorisingrates,particularlythroughvariationsinthehousing

market.USactivityhasbeenremarkablyresilientthisyeardespitethe525bpofrate

hikes,whilethesamecannotbesaidformostoftherestoftheG10(

Exhibit3

,left).AsFedChairPowellsaidrecently,rates-sensitivepartsoftheUSeconomyhaveweakenedasexpected,butUSconsumptionhashelpupverywellbothrelativetopasthiking

cyclesandtotherestoftheworld,boostedbystrongincomegrowth.

10November20233

2024GlobalFXOutlook

GoldmanSachs

8

8

6

6

4

4

2

2

0

0

-2

-2

-4

-4

ChangestotheUSeconomyhavealsolikelycontributedtotherelativeperformance.AsChairPowellalsosaidrecently,therearesomeaspectsoftheUSeconomythatare“alittledifferent”today.Inparticular,theextendedperiodoflowratesandshiftto30-yearmortgageshaveloweredthebetafromthefederalfundsratetohouseholdmortgage

payments.TheslowerriseinthemortgageserviceratiohassavedUShouseholds

around$3500comparedwiththesamepointinpriorcycles(

Exhibit3

,right)andamuchmoregradualtighteningthantherestoftheworld.Ineffect,thisnowrepresentsabout$355ofaddedspendingpowerpermonthrelativetothe2004cycle.ChairPowell

suggestedthatthisisonereasonwhytheUSeconomymaybe“structurallyalittlemoreresilienttointerestrates.”ThisisalreadyreflectedinourforecastofrelativeUSresilienceandonlyaslowdeclineintheDollar,butitdemonstrateswhywestillseesomeupsiderisksfromcurrentlevelsifitturnsoutthatthemorebalancedgrowthoutlookweexpectultimatelyrequiresmoredivergentpolicysettings.

Exhibit3:USresiliencetohigheryieldsisanupsiderisktotheDollaroutlook

GSCurrentActivityIndicator

G10Range

USCurrentActivityIndicator

(3mma)

Covidperiod

2014201520162017201820192020202120222023

AverageMonthlyHouseholdMortgageServicePayment

$

4500

Ifmortgageservicepaymentsrose...

4000

Inlinewith2004500bphikingcycle

1:1withthepolicyrate

Actual

3500

3000

Cumulative$3480savedcomparedto2004500bpcycle

2500

2000

1500

Mar-22Jul-22Nov-22Mar-23Jul-23Nov-23

$

4500

4000

3500

3000

2500

2000

1500

Source:HaverAnalytics,GoldmanSachsGlobalInvestmentResearch

TheRiskofReignition

StrongeractivitydatabyitselfisnotenoughtobeoutrightbullishontheDollar.Foronething,itisgenerallythechangeingrowthexpectationsthatmattersforananticipatoryassetlikeFX.But,asrecentdevelopmentshavedemonstrated,thepolicyresponsealsomatters.Ourforecastofstronggrowthbutfallinginflationshouldultimatelyallowsomeglobalpressurestorelax,andweakentheDollar.And,ifstrongdataleadtohigher

inflationriskpremiabutlimitedpolicyaction,thattendstohavealesspowerfulimpactontheUSD.Bythesametoken,themaindownsiderisktotheDollarcomesfromtheprospectofearliernon-recessionaryratecutsthaninourbasecase,inwhichcasetheDollarcouldweakenmoresharplyespeciallyagainstcyclicalG10andEMcurrencies.If,ontheotherhand,FOMCofficialsbegintoworrythatresilientgrowthcouldimpede

progresstowardstheirinflationgoal,restartingthehikingcyclecouldseetheDollar

re-testthe2022highs.Ultimately,FXtendstorespondtorealratedifferentials

(Exhibit

4

).And,iftheFedbeginstomoreactivelyconsiderfurtherhikesatsomepointnext

year,therearenotmanyDMDollar“challengers”thatwouldbeabletorespond.

10November20234

2024GlobalFXOutlook

GoldmanSachs

Exhibit4:RealratedifferentialstendtodriveFX

PercentAverageWeeklyEUR/USDReturnYTDPercent

1.0

0.8

0.6

0.4

0.2

0.0

-0.2

-0.4

-0.6

I

LedbyRealRatesLedbyBreakevens

IncreaseinEUR-USD5yNominalRateDifferential

I

LedbyBreakevensLedbyRealRates

DecreaseinEUR-USD5yNominalRateDifferential

1.0

0.8

0.6

0.4

0.2

0.0

-0.2

-0.4

-0.6

Source:GoldmanSachs,GoldmanSachsGlobalInvestmentResearch

EUR:StartingfromStagnant

MovingOn,MovingUp

Inourbaseline,oureconomistsexpectEuroareagrowthtopickupinthesecondhalfoftheyearashouseholddisposableincomerecoversfromtheenergypriceshock.Our

forecastembedsanimportantassumptionthiswilltranslateintoabigincreasein

consumption,especiallyinGermany.AstheEuroareaeconomymovesonfromtheenergyshockandintoabetterbalancewiththerestoftheworld,itshouldslowly

supportthecurrency’srecoverybacktowardsrecenthighsofaround1.10byyear-end.Butthepathfromheretothereislikelytobechallengingatfirst.

Worries,I’veGotaFew

Ourbaselinerepresentsanarrowpathwithkeyrisksonbothsides,butthedomestic

onesaremostlytothedownside.Mostimportantly,therecentdatatrendis

inconsistentwithastrongercurrency.Ifnothingchanges,theEuroshouldfall.The

cyclicalpictureisquitedivergenttotheUS,andtherehavebeensomeworryingsignsthatweakdemandisnowspillingintoasofterlabormarket.Ifitcontinues,thiswouldinterrupttheconsumption-ledrecoverythatweanticipate.

Thisisonlypartlyreflectedinmarketsnow.SomeoftheEuro’sresiliencecanbe

attributedtorelativelyfirmECBexpectationswhencomparedtotheincomingdata.Thatislikelypartiallyduetotheperceptionthathighinflationwillkeepmonetarypolicy

pinnedforawhile.But,thereisnoparticularevidenceatthisstageofmuchmore

persistentinflationintheEuroarearelativetootherjurisdictions.Afteraperiodofweakactivity,andastheeffectofhigherenergypricesfades,inflationisalreadydeclining

rapidly(

Exhibit5

,left).Unlessactivitycanrecoverasweexpect,inflationneartargetwillopenthedistributiontoearlierandmorerapidcuts.But,front-endpricingshowsvery

10November20235

2024GlobalFXOutlook

GoldmanSachs

Fed

ECB

littledifferencebetweenECBandFOMCexpectationsdespiteamarkedlydifferentcyclicalpicture(

Exhibit5

,right).

Exhibit5:InflationshouldnotbeaconstraintfortheECBmuchlonger

Percentchange,yearagoPercentchange,yearago

8

7

6

5

4

3

2

1

0

USCorePCE

EACoreCPI

8

7

6

5

4

3

2

1

0

Jan-21Oct-21Jul-22Apr-23Jan-24Oct-24

Cuts(-)PricedIntoOISCurve

asofNov.9,2023

bps 20 0 -20 -40 -60 -80-100-120-140-160

-180

Nov-23Mar-24Jul-24Nov-24Mar-25Jul-25Nov-25

bps

20

0

-20

-40

-60

-80

-100

-120

-140

-160

-180

Source:Bloomberg,Eurostat,USDepartmentofCommerce,GoldmanSachsGlobalInvestmentResearch

AsisalwaysthecasefortheEuroarea,aprolongedperiodofweakeractivitygrowth

risksexposingthefamiliarfaultlinesinsovereigncredit,whichwouldalsoweighontheEuro.Rightnow,therearetwoadditionalconsiderationsbringingthisrisktothefore.

First,elevatedglobalyieldsmeanthereislessfiscalspaceandmorefocusonindebtedcountriessuchasItaly,whichcannotsustainthemixofhighyieldsandweakactivity.

Second,iftheECBdecidesthatadjustingPEPPreinvestmentsisaprerequisitefor

policyratecuts(asoureconomistsexpect)despiteaweakactivitypicture,thelackofcreditbackingwouldmeanremovingsomesupportataninopportunetimefortheEuro.Ineffect,theECB’snormalizationsequenceismoreimportantforfixedincomethan

foreignexchange.

Inaddition,furtherupsideenergypriceshocks—eitherfromweatherorgeopolitical

events—remainanimportantconcernandwouldlikelyweighontheEuroagain.Therearetwochannelsforthis.First,higherenergypricestendtoweighontheEuroarea’s

termsoftradeandwouldunderminetherecoveryinrealincomesthatweexpectto

underpinthegrowthrecoveryin2024.Second,yetanotherboutofvolatilityinEuropean

energypricesmightreinforcethealready-weakenergy-intensivemanufacturing

investmentoutlook,whichwouldhaveimportantimplicationsfortheEuroareacurrentaccountandfundamentalfairvaluefortheEuro.

Thekeyupsideriskstoourforecastcomemainlyfromabroad.First,moresubstantialpolicystimulusfromChinacouldassisttheEuroareaandoffsetsomeoftheglobal

spilloversfrommorerestrictiveUSmonetarypolicy.Second,afastermovetowards

non-recessionaryratecutsintheUSwouldlikelycompresstherealratedifferentialandsupporttheEuro.

1.10,WeMeetAgain

Formostof2023,wemaintainedayear-endEUR/USDforecastof1.10,despiterapidlyreachingthatlevelinearlyFebruary.OurstrongestviewhasbeenthatEUR/USDcannot

10November20236

10November2023

7

movemuchfurthertowards“fairvalue”levelsaround1.20untilthereisclearevidenceoflimitedscarringfromtheenergypricespikeandotherfactorsthathaveweighedontheEuroareaforthelastcoupleofyears(and,inabroadersense,muchofthelast

decade).

Wemaintainthatview.Althoughlonger-termestimatesoffairvaluearecloserto1.20,therearebothcyclicalandstructuralreasonswhyitwillbedifficulttorisetowardsthat

levelwithoutamoresubstantialchangeincurrentconditions.Structurally,the

compositionoftheEuroarea’scurrentaccounthaschangedmateriallyintheaftermathoftheenergyshock.IfthisrepresentsapermanentchangeinEuroareaexportactivity,EUR/USDisnotfarfromfairvaluearoundcurrentlevels.Andcyclically,thedownside

riskshighlightedaboveshouldcontinuetoweighonthecurrencyuntiltheyareresolvedwithoutthehelpofdivergingmonetarypolicy.Inthenearterm,wecontinuetosee

riskstocurrentspotasskewedtothedownsideandhaverevisedourforecaststo1.04,1.06and1.10in3,6and12months(from1.07,1.10and1.12,whichweestablishedbackinJuly).

CNY:PolicyPushesBack

TheChinesecurrencyhasdepreciatedroughly5%year-to-dateversustheDollar,andbymorethanthatafterdiscountingtheoptimismsurroundingtheCovidre-openingboostearlierintheyear.Sincethen,aconsistentstreamofdisappointingactivitydata,

propertymarketweaknessandratecuts(incontrasttoaFedthatwasmovingrates

higher)hasmeantthattheRenminbihasbeenunderconsistentdepreciationpressurethroughmostof2023.Whiletheprecisemixofmacroimpulseswillshiftgoinginto

2024,atleastforthefirsthalfoftheyear,weexpectacontinuationofthatcyclical

weakness.Whiletheeconomicgainsfromre-openingfade,fiscalstimulusshould

supportgrowth,asshouldasmallerdragfromhousing.Still,weexpectChina’soverallGDPgrowthtoslowto4.8%in2024(relativeto5.3%in2023),asChina’sdeterioratingdemographicscontinuetotakeatoll,andoureconomistsexpectmoreratecutsinthemonthsaheadtosupportactivity.Ontheexternalsideaswell,weexpectthecurrentaccountsurplustograduallyshrinkfromitspandemichighs.Togethertheseforcesarelikelytokeepthecurrencyundercyclicalpressure.

However,whetherthiscyclicalpressuremanifestsinaweakercurrencyis,toalarge

extent,afunctionofpolicymakerpreference.ThePBoChaskepttheUSD/CNYdaily

spotfixingaround7.18foralmosttwomonths,restrainingthemovehigherinspot

USD/CNY(

Exhibit6

).Althoughaweakercurrencywouldhelpeasefinancialconditionsandsupportactivity,policymakersremainconcernedaboutarecurrenceoflarge-scale

capitaloutflowsandhaveemphasisedtheimportanceofFXstability.Moreover,withthecurrencyalreadyverycompetitiveonarealbasisgiventheinflationdifferentials,and

substantialcurrencyreservesandcontroloverthefinancialsystem,thereisbothwillingnessandabilitytokeepthecurrencystable.

2024GlobalFXOutlook

GoldmanSachs

7.4

7.2

7.0

6.8

6.6

6.4

6.2

6.0

Exhibit6:ThePBoChaskepttheUSD/CNYdailyspotfixingaround7.18foralmosttwomonths,restrainingthemovehigherinspotUSD/CNY

USD/CNY

USD/CNYfixCounterCyclicalFactor(right)

20192020202120222023

Pips

800

600

400

200

0

-200

-400

-600

-800

-1000

-1200

-1400

-1600

Source:Bloomberg,GoldmanSachsGlobalInvestmentResearch

Insum,weexpectthatpolicypushbackwilllikelykeepcyclicalandcapitalflow

pressuresatbayandkeeptheUSD/CNYcrossratesteadyaroundcurrentlevelsof7.30overthenext3-6months.Aswemovedeeperintotheyear,theprospectsforsome

gradualstrengtheningintheRenminbiarebetterasinterestratesstartmovinglowerglobally,andcastingthevaluepropositioninChineseratesinalessnegativelight.ButequallyifUSratestakeanotherleghigheritwillbeincreasinglytrickyforChinese

policymakerstomaintaincurrencystabilityagainsttheDollarwhilealsosupportingaweakeconomywithlowerrates.Atanyrate,thecombinationofstability(withsomeriskoffurtherweakness)andnegativecarryisstilllikelytokeepCNYfirmlyamongthefundersinacurrencyportfolio(

Exhibit7)

.

10November20238

2024GlobalFXOutlook

GoldmanSachs

USD/CNH12mCarryto3mVolRatio

Exhibit7:NegativecarryisstilllikelytokeepCNYfirmlyamongthefundersinacurrencyportfolio

Ratio

Percent

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

USD/CNH12mCarry(right)

4.0

3.0

2.0

1.0

0.0

-1.0

-2.0

-3.0

-4.0

20192020202120222023

Source:GoldmanSachs,GoldmanSachsGlobalInvestmentResearch

Box:FXHedging—AnInvestor’sFramework

ThesharpriseinFXvolatilityin2022sparkedrenewedinterestincurrencyhedgingamongcorporateswithinternationalexposure,aswellasvariousinvestorswithglobalportfolios.Sincemanyinstitutionsare

consideringthisstrategyforthefirsttimeorwouldliketodevelopastructuredapproachtotheprocess,weexploretheacademicliteratureandtheempiricalevidencetoconstructasimplifiedframeworkforFXhedgingdecisionsbybasecurrencyanddestinationmarketacrosssixmajoreconomies—theUS,Canada,Japan,Australia,theEuroarea,andtheUK.

Whiletheliteraturelacksbroadconsensusontheoptimalhedgingstrategyoutsideofforeignbond

investments,therearetwocommonfeaturesofthedebate:theimpactonportfolioriskandtheimpactonportfolioreturns.We(andothers)findthattheconclusionsfromeachcansometimesbecontradictory,

particularlyinthecaseofJapaneseequities(Exhibit8).Therefore,theidealhedgingapproachdependsontherelativegoalsoftheinstitution.Mostwilllikelycaretosomeextentaboutbothriskreductionand

returnmaximization.

10November20239

2024GlobalFXOutlook

GoldmanSachs

Exhibit8:TheYenhasnaturalhedgingproperties,butaveragereturnsoverrecentdecadeshavebeenhigherforDMinvestorswhohavehedgedtheirpurchasesofJapaneseequities

Correlation

Correlation

12mRollingCorrelation:FX/USDandDomesticEquityReturns

(January1996-September2023)

1.00.80.60.40.20.0-0.2-0.4-0.6-0.8-1.0

MedianMax/Min

CADJPYAUDEURGBP

1.00.80.60.40.20.0-0.2-0.4-0.6-0.8-1.0

Percentage

points

Percentage

points

6.0

5.0

4.0

3.0

2.0

1.0

0.0

DifferenceinAverageReturn:Hedgedvs.UnhedgedJapaneseEquitiesByInvestorBaseCurrency

(February1995-September2023)

USDCADAUDEURGBP

6.0

5.0

4.0

3.0

2.0

1.0

0.0

Averagereturn=averageofmonthlyannualizedreturns.

Source:Bloomberg,GoldmanSachsGlobalInvestmentResearch

WeassessthehistoricalimpactofFXhedgingonvolatilityandreturnsusingasetofvarioussamples

acrossmajordevelopedmarkets,andwefindfourfactorsthatappearmeaningful:i)theportfolio

composition,ifapplicable,ii)therelative“safety”oftheforeigncurrency,iii)thelevelofcarry,andiv)theoddsofrecessionovertheinvestmenthorizon.Thesefactorswouldhavesentastrongsignalin2022infavorofUSD-basedinstitutionshedgingtheirforeigncurrencyexposure,duetothecombinationofrisingDollarcarry,theDollar’ssafe-havenstatus,andthegrowingoddsofaUSrecessionatthetime(Exhibit9).Butevenwhenrecessionoddshavebeenlow,a