Yen Rally Sparks Crypto Market Shakeup: What Traders Need to Know

Yen Rally- Yen Outperforms in Forex Markets Amid Global Market Volatility

Yen Rally– The Japanese yen (JPY) is experiencing a strong rally against the U.S. dollar (USD), outperforming other major fiat currencies. This resurgence mirrors early August market activity, which saw sharp declines in global stock markets and Bitcoin (BTC). Since late Thursday, the yen has strengthened by 2.4%, reaching 145 per dollar. This marks a significant rebound from its August 5 low of 141.68, signaling renewed investor confidence in the yen as an anti-risk currency.

Yen’s Strength Against Global Currencies: A Barometer of Risk Appetite

In addition to its gains against the USD, the yen has also strengthened by over 1% against the Australian dollar, which is often viewed as a barometer of global risk appetite. The yen’s performance is even more pronounced against the euro and the British pound, reflecting its increasing appeal amid global market uncertainty.

Impact on Carry Trades and the Crypto Market

The current activity in the foreign exchange market is reminiscent of the yen’s outperformance at the end of July and early August. During that period, the rising yen catalyzed the unwinding of carry trades—bullish, risk-on bets financed by relatively cheap yen-denominated loans. As it became more expensive to borrow the Japanese currency, investors reduced their exposure to risk, impacting traditional markets and weighing heavily on Bitcoin and the broader crypto market. BTC, for example, dropped from roughly $70,000 to $50,000 in just eight days, before recovering to $60,000 alongside a bounce in the USD/JPY exchange rate.

The Negative Feedback Loop and Crypto Market Risks

According to Simon Ree, a renowned trader, the yen’s strength is triggering a negative feedback loop. As overextended carry positions get unwound and stops are triggered, global risk assets, including Bitcoin, are feeling the pressure. Andrei Kazantsev, the head of Goldman Sachs’ crypto-linked trading desk, echoed these sentiments, noting that Bitcoin and Ethereum were caught in the yen carry trade unwind and the global VAR (Value at Risk) shock of August 5. VAR represents the maximum potential loss a market can sustain over a specific period. A sudden increase in VAR forces traders to scale back their exposure to riskier assets, adding more volatility to the market.

ING’s Perspective on Yen’s Rally and Future Outlook

The renewed strength of the yen has not gone unnoticed by market analysts. ING highlighted that the yen’s rally from 161 to 141.68 per dollar in the three weeks leading up to August 5 has set a strong precedent for yen buying on dips. A 20-big figure drop in USD/JPY, we believe, will have a meaningful impact on future expectations and behavior, ING said in a note to clients on August 16. This shift in behavior likely means a greater willingness to buy yen at weaker levels, skewing the risk towards further yen strengthening.

Potential Resumption of Carry Trade Unwind and the FOMC’s Next Move

Looking ahead, some market observers suggest that the carry trade unwind could resume in the coming weeks, influenced by the U.S. economy and the upcoming Federal Open Market Committee (FOMC) meeting scheduled for mid-September. Currently, Fed funds futures predict a 50% chance of a 50-basis-point rate hike in September. However, global macro strategist Arnim Holzer of Easterly EAB Risk Solutions expects these odds to decrease as the FOMC meeting approaches, given generally acceptable economic data. Holzer notes that while an initial positive market reaction could follow a 50-basis-point rate cut, concerns about the economy and renewed yen strength could trigger another round of carry trade unwinds.