It could be a coincidence, however the current decline within the Nasdaq and bitcoin (BTC) coincides with a pointy rise in Japanese authorities bond yields and the strengthening of the safe-haven Japanese yen (JPY), paying homage to the market dynamics seen in early August.
There might be a causation right here, as, for many years, the low-yielding yen propped up world asset costs. The continued rise within the Japanese yen could have had a hand within the current threat aversion on Wall Avenue and within the crypto market.
That stated, the bullish positioning within the Japanese yen seems to be overstretched, with speculators holding file longs final week, in keeping with the CFTC information tracked by MacroMicro. Such excessive bullish positioning, representing a collective perception in a continued transfer greater within the asset, units the stage for disappointment, following, which a mass unwinding of longs unfolds, resulting in a fast bearish reversal.
In different phrases, the yen’s rise may stall for now, providing reduction to threat belongings, together with Nasdaq and bitcoin.
“We are actually cautious on chasing additional JPY power, given stretched speculative positioning in addition to sturdy dip-buying urge for food from the home neighborhood,” Morgan Stanley’s G10 FX Technique group stated in a be aware to purchasers late Friday.
Strategists defined that many Japanese traders use the Nippon Particular person Financial savings Account (NISA) scheme to snap up international belongings throughout risk-off, inadvertently slowing the tempo of JPY appreciation. Moreover, the general public pension system tends to go towards the development, rebalancing out of JPY belongings.
“Certainly, such state of affairs occurred in final August after a pointy appreciation of the JPY and the pronounced sell-off in equities,” strategists famous.
Let’s have a look at if historical past repeats itself, triggering a renewed risk-on sentiment for Nasdaq and bitcoin. The USD/JPY pair turned up following the July and early August slide to 140, finally rising to 158.50 by January. BTC turned up as nicely from the early August crash to $50,000, rising to new file highs above $108,000 in January.
At press time, bitcoin traded close to $80,300, representing a month-to-date decline of practically 5%, extending February’s 17.6% slide. At one level early Tuesday, costs dipped to $76,800, in keeping with CoinDesk information.
In the meantime, USD/JPY traded at 147.23, having put in a five-month low of 145.53 early Tuesday, TradingView information present.
Non permanent respite?
Whereas the stretched bull positioning and institutional flows recommend reduction forward, these elements could do little to change the broader bullish outlook for JPY, which is backed by a narrowing U.S.-Japanese bond yield differential.
So, threat asset bulls must be vigilant for indicators of volatility within the yen and the broader monetary markets.
The chart reveals the unfold between yields on the 10-year U.S. and Japanese authorities bonds.
The unfold has narrowed to 2.68% in a JPY-positive method, reaching the bottom since August 2022. Plus, it has dived out of a macro uptrend, suggesting a serious bullish shift within the JPY outlook.