It may be a coincidence, but the recent decline in the Nasdaq and bitcoin (BTC) coincides with a sharp rise in Japanese government bond yields and the strengthening of the safe-haven Japanese yen (JPY), reminiscent of the market dynamics seen in early August.
There could be a causation here, as for decades, the low-yielding yen has propped up global asset prices. The ongoing rise in the Japanese yen may have had a hand in the recent risk aversion seen on Wall Street and in the crypto market.
That said, the bullish positioning in the Japanese yen appears overstretched, with speculators holding record long positions last week, according to CFTC data tracked by MacroMicro. Such extreme bullish positioning represents a collective belief in a continued upward movement of the asset, setting the stage for potential disappointment. This could trigger a mass unwinding of long positions, facilitating a quick bearish reversal.
In other words, the yen’s rise could stall for now, offering some relief to risk assets, including the Nasdaq and bitcoin.
“We are now cautious on continuing to chase further JPY strength, given the stretched speculative positioning and the strong dip-buying appetite from the domestic community,” noted Morgan Stanley’s G10 FX Strategy team in a recent client communication.
Strategists clarify that many Japanese investors utilize the Nippon Individual Savings Account (NISA) scheme to acquire foreign assets during periods of risk aversion. This practice inadvertently slows the pace of JPY appreciation. Additionally, the public pension system often reacts counter-cyclically, rebalancing away from JPY assets.
“Indeed, such a scenario was evident last August following a sharp appreciation of the JPY, culminating in a pronounced sell-off in equities,” pointed out strategists.
As we assess the current conditions, it will be interesting to see if history repeats itself, inciting a renewed risk-on sentiment for the Nasdaq and bitcoin. Notably, the USD/JPY pair turned upward after the July and early August decline to 140, ultimately rising to 158.50 by January. BTC saw a similar trajectory, rebounding from the early August crash to $50,000 and eventually reaching new record highs above $108,000 in January.
At present, bitcoin is trading near $80,300, reflecting a month-to-date decline of nearly 5%, extending February’s substantial 17.6% dip. At one point early Tuesday, prices dipped to $76,800, based on CoinDesk data.
Simultaneously, the USD/JPY is trading at 147.23 after hitting a five-month low of 145.53 earlier on Tuesday, as indicated by TradingView data.
Temporary Respite?
While the stretched bullish positioning and institutional flows suggest potential relief on the horizon, these factors may do little to alter the broader bullish outlook for the JPY, which is supported by a narrowing U.S.-Japanese bond yield differential.
Thus, risk asset bulls must remain vigilant for signs of volatility in the yen and the broader financial markets.
The accompanying chart illustrates the spread between yields on 10-year U.S. and Japanese government bonds. This spread has narrowed to 2.68% in a manner sympathetic to the JPY, reaching its lowest level since August 2022. Moreover, it has descended from a macro uptrend, indicating a significant bullish shift in the JPY outlook.
