Global foreign-exchange strategy and energy-linked FX risks: Goldman Sachs turns more constructive on the yen while highlighting diesel-export and election risks across FX markets

Overview

This global FX strategy update assesses changing policy, growth, commodity and political drivers across JPY, USD, MXN, CHF and BRL. Its central shift is a more constructive view on JPY as Japanese policy conditions improve, alongside caution over diesel-related risks for Latin American FX and a continued expectation of CHF underperformance.

Core views

JPY: Goldman Sachs argues that the yen's cheap valuation had previously been insufficient to stop depreciation without either domestic-policy change or weaker global growth. Following new 40-year lows, Japan's largest FX intervention in 15 years forced a sharp reduction in tactical JPY carry positions. The Bank of Japan then moved to a faster rate-hiking pace, stabilizing the persistent rise in Japan's term premium, while the likelihood of Japanese investors rotating toward domestic assets increased. The report sees these developments as making domestic policy more supportive of the currency: faster hikes reduce the inflationary effects of expansionary fiscal policy, potential portfolio-flow shifts add downside asymmetry to USD/JPY, and further intervention risk should limit USD/JPY upside. Goldman Sachs therefore revised its USD/JPY forecasts down from 162, 163 and 165 to 158, 155 and 150 at the 3-, 6- and 12-month horizons. It favors long JPY, particularly as a hedge against emerging recession fears, though USD/JPY could rise if US growth outpaces the rest of the world, the Fed hikes more than expected, BoJ tightening falls short and domestic flows do not shift. Conversely, faster BoJ hikes, a less hawkish Fed, evidence of portfolio reallocation or worsening growth could push USD/JPY below the baseline. USD: The report attributes recent Dollar strength to Fed follow-through, commodity-price pressure and higher yields. It notes that FX moves have remained relatively contained compared with rates and commodities because growth has been resilient across much of the world and policy expectations have been repriced in a similar direction. Goldman Sachs expects relatively low total returns outside carry and mixed Dollar performance from current spot levels, reflecting its relatively dovish Fed view alongside solid US capital-return prospects. The downside risk to the Dollar is principally policy risk in the US and elsewhere, while more pronounced inflation pressure or a prolonged capital-expenditure cycle could require tighter financial conditions and support the Dollar. Recent hawkish FOMC communication has reduced the immediate downside policy tail, and higher commodity prices plus a possible diesel-export ban have added upside risk, but neither has changed the baseline outlook. MXN: The Mexican peso underperformed other emerging-market currencies during the broader EM FX sell-off despite its usual sensitivity to broad Dollar moves. Goldman Sachs attributes this in part to concern over a possible US diesel-export ban, for which Mexico appears relatively exposed. With MXN implied volatility near historical lows and the peso screening as overvalued against longer-run measures, the report argues that the market had little premium for negative news, helping explain the sharp reaction. The potential ban and whether Mexico gains an exemption are the main tactical risks; the threshold for USD/MXN volatility to normalize higher is low. Still, under Goldman Sachs's baseline of strong US equity performance and limited FX risk from USMCA negotiations, MXN remains an attractive medium-term carry long, particularly against lower-carry funding currencies such as EUR. The key medium-term issue is Banxico's reaction to MXN and a more hawkish Fed backdrop after it removed guidance that holding the policy rate would be appropriate while stating that a mechanical response to US policy is not warranted. CHF: The Swiss National Bank held rates at its September meeting and shifted to a neutral bias on FX intervention for the first time since December. Goldman Sachs considers this consistent with the SNB's historically more hands-off stance when inflation is in the current range, but insufficient to reverse CHF underperformance. A firmly on-hold SNB, compared with more aggressive tightening elsewhere, has been a key source of weakness in the franc amid resilient global growth, attractive carry and widening rate differentials. The report now forecasts EUR/CHF at 0.95, 0.96 and 0.97 in 3, 6 and 12 months, versus 0.92 at each horizon previously. It sees the risk of stronger CHF through higher gold prices or more material foreign-currency sales as relatively contained absent a more meaningful SNB policy shift. BRL: Brazil's October 4 general election, with a potential October 25 second round, is expected to make fiscal-policy implications an important BRL driver. Historical election evidence shows that first-round results can move FX materially but that the moves need not persist: USD/BRL declines after the first round in 2014 and 2022 fully reversed before the second round, while BRL was strongest in 2018 on the Friday before that round. The report argues that markets quickly refocus on tangible outcomes such as cabinet appointments and policy implementation, while the global risk backdrop remains relevant. Using a cyclical fair-value model and residual BRL performance since the 2024 depreciation episode, Goldman Sachs estimates that USD/BRL at 4.80 would be consistent with full compression of the residual fiscal premium and with longer-run valuations based on a 60:40 average of its GSDEER and GSFEER models. Fiscal consolidation and a supportive external environment could take BRL beyond that level, whereas a negative fiscal outcome could put USD/BRL at 5.80, reflecting a fiscal premium similar to December 2024. Diesel and FX: A temporary US diesel-export ban could affect FX through a direct growth shock to economies heavily dependent on US diesel imports and through broader energy terms-of-trade and risk-sentiment effects. Import-dependency data identify much of Latin America as especially exposed, and Goldman Sachs believes these concerns explain much of the week's broad Latin American FX underperformance. Mexico and the euro area are among the largest direct importers, but dependency alone does not capture substitutability, regional growth sensitivity, currency anchors or global terms-of-trade dynamics. Higher diesel prices could benefit energy exporters relative to importers. The report identifies CLP, PEN and MXN as the currencies most at risk from a ban announcement and expects further Dollar support in that scenario.

Analysis framework

Goldman Sachs combines policy developments, interest-rate differentials, valuation signals, historical market behavior, implied-volatility conditions, trade and import-dependency data, and scenario analysis. It tests how policy and macro shocks could affect currency flows, carry returns, growth exposure and fair-value deviations across the relevant currency pairs.

Methodology notes

• MacroeconomicsInterest rate parity

  Interest-rate differentials and central-bank reaction functions

  The report uses expected BoJ, Fed, SNB and Banxico policy paths and resulting rate differentials to explain currency carry, funding incentives and prospective FX moves.

• Event-Driven and Behavioral FinanceEvent-driven analysis

  Election and policy-event scenario analysis

  The report draws on prior Brazilian election behavior and considers possible diesel-export restrictions to estimate how event outcomes could change FX risk premia and exchange rates.

• Other

  GSDEER and GSFEER fair-value models

  Goldman Sachs uses its proprietary long-run valuation measures, including a 60:40 GSDEER/GSFEER average for BRL, to compare spot exchange rates with estimated fair value and residual fiscal premia.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• JPY / USD/JPY

  Goldman Sachs favors long JPY and lowers USD/JPY forecasts as Japanese policy and intervention dynamics become more supportive.

  Strengths

  Cheap valuation, faster BoJ hikes, possible domestic portfolio reallocation and intervention risk.

  Weaknesses

  The portfolio-flow shift remains speculative.

  Comparison

  JPY could perform particularly well if recession fears emerge.

  Risks

  USD/JPY could continue rising if US growth and Fed tightening exceed expectations while BoJ hikes and portfolio shifts disappoint.

• MXN / USD/MXN

  The report retains a medium-term constructive carry view but flags near-term vulnerability to a potential US diesel-export ban.

  Strengths

  High carry-to-volatility and potential support from strong US asset performance.

  Weaknesses

  MXN screens as overvalued against longer-run valuations and began from historically low implied volatility.

  Comparison

  Goldman Sachs views MXN as attractive against lower-carry funders such as EUR.

  Risks

  A diesel-export ban, lack of a Mexican exemption and higher USD/MXN volatility could undermine the tactical view.

• CHF / EUR/CHF

  Goldman Sachs expects continued CHF underperformance and raises EUR/CHF forecasts.

  Weaknesses

  The SNB is expected to remain on hold while other central banks tighten more aggressively.

  Comparison

  Widening rate differentials and large carry favor EUR/CHF.

  Risks

  A rebound in gold prices or more material foreign-currency sales could strengthen CHF.

• BRL / USD/BRL

  Brazil's election and its fiscal consequences are expected to be important drivers of BRL.

  Strengths

  Fiscal consolidation and a supportive external backdrop could compress the fiscal premium and strengthen BRL.

  Weaknesses

  Election-related moves may be volatile and not durable.

  Comparison

  The report benchmarks prospective moves against residual BRL performance after the 2024 depreciation episode.

  Risks

  A negative fiscal outcome could lift USD/BRL toward 5.80.

Key data

• USD/JPY forecast158, 155, 1503-, 6- and 12-month forecasts, revised from 162, 163 and 165.
• EUR/CHF forecast0.95, 0.96, 0.973-, 6- and 12-month forecasts, revised from 0.92 at each horizon.
• USD/BRL fiscal-premium scenario4.80Consistent with full compression of the residual fiscal premium from the 2024 depreciation episode and longer-run valuation measures.
• USD/BRL negative fiscal scenario5.80Reflects a fiscal premium similar to December 2024.
• Brazil election datesOctober 4 and October 25General-election first round and potential second round.

Impact & implications

The report sees Japanese policy normalization and intervention risk as changing the yen's balance of risks, while resilient global growth continues to contain broad FX volatility. It identifies a diesel-export restriction as a potential shock that could hurt diesel-dependent Latin American currencies and support the Dollar, and it frames Brazil's election outcome and subsequent fiscal implementation as pivotal for BRL.

Risks

• USD/JPY may rise if US growth remains stronger than elsewhere, the Fed tightens more than expected, BoJ hikes fall short and Japanese portfolio flows do not shift.
• A potential US diesel-export ban could increase USD/MXN volatility and weigh on MXN, CLP and PEN.
• A negative Brazilian fiscal outcome after the election could sustain a larger BRL fiscal premium.
• Higher gold prices or more material foreign-currency sales could create upside risk to CHF.

What to watch

• The pace of BoJ rate hikes, Japanese FX intervention and evidence of Japanese investor reallocation toward domestic assets.
• Fed policy delivery, inflation pressure, commodity prices and the possibility of a prolonged US capital-expenditure cycle.
• Whether a US diesel-export ban is enacted and whether Mexico receives an exemption.
• Banxico's response to MXN developments and US monetary-policy changes.
• Brazil's October 4 election result, a possible October 25 second round, cabinet appointments and subsequent fiscal-policy implementation.