It could be mere coincidence, but the recent downturn in the Nasdaq and bitcoin (BTC) seems to align with a significant increase in Japanese government bond yields and a strengthening of the safe-haven Japanese yen (JPY), echoing the market behaviors observed in early August.
There might be a causal relationship at play, as the long-standing low yields on the yen have historically supported global asset prices. The current ascent of the Japanese yen may have contributed to the prevailing risk aversion on Wall Street and within the crypto market.
However, the bullish sentiment surrounding the Japanese yen appears to be excessive, with speculators accumulating record long positions last week, according to CFTC data monitored by MacroMicro. Such extreme bullish positioning, reflecting a widespread expectation of further increases in the asset, could lead to a scenario of disappointment, which would trigger a swift unwinding of longs and a rapid bearish reversal.
In simpler terms, the yen’s upward trajectory might hit a pause for now, potentially providing relief to risk assets like the Nasdaq and bitcoin.
“We are currently cautious about pursuing additional JPY strength, given the stretched speculative positioning and robust dip-buying appetite from domestic investors,” noted Morgan Stanley’s G10 FX Strategy team in a client memo released late Friday.
Analysts pointed out that numerous Japanese investors leverage the Nippon Individual Savings Account (NISA) to acquire foreign assets during risk-off periods, inadvertently slowing the pace of JPY appreciation. Additionally, the public pension system often acts contrary to trends, rebalancing away from JPY assets.
“Indeed, a similar scenario occurred last August with a significant appreciation of the JPY followed by a pronounced sell-off in equities,” strategists remarked.
We will see if history repeats itself, potentially reigniting risk-on sentiment for the Nasdaq and bitcoin. The USD/JPY pair rose after the July and early August decline to 140, eventually climbing to 158.50 by January. Similarly, BTC recovered from the early August drop to $50,000, soaring to record highs above $108,000 in January.
As of now, bitcoin is trading close to $80,300, reflecting a month-to-date decrease of nearly 5%, adding to February’s 17.6% decline. Early Tuesday, prices dropped to $76,800, according to CoinDesk data.
In the meantime, USD/JPY is trading at 147.23, having touched a five-month low of 145.53 early Tuesday, TradingView data indicates.
Temporary relief?
While the extreme bullish positions and institutional flows imply potential relief ahead, these elements may not significantly affect the overall optimistic outlook for the JPY, which is supported by a decreasing U.S.-Japanese bond yield gap.
Thus, bulls in risk assets should remain alert for potential volatility in the yen and the wider financial markets.
The chart illustrates the difference between yields on the 10-year U.S. and Japanese government bonds.
This spread has narrowed to 2.68% in a manner favorable to the JPY, reaching the lowest level since August 2022. Moreover, it has dropped out of a macro uptrend, signaling a significant bullish shift in the outlook for the JPY.
