Recent Market Trends
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 propped up global asset prices. The ongoing rise in the Japanese yen may have been a factor in recent risk aversion on Wall Street and in the crypto market.
However, the bullish positioning in the Japanese yen looks overstretched, with speculators holding record longs last week, according to CFTC data tracked by MacroMicro. Such extreme bullish positioning, representing a collective belief in continued appreciation, sets the stage for possible disappointment, which could lead to a quick bearish reversal.
In other words, the yen’s rise could stall for now, potentially providing relief to risk assets, including Nasdaq and Bitcoin.
Morgan Stanley’s G10 FX Strategy team expressed caution about further JPY strength due to stretched speculative positioning and strong dip-buying appetite from the domestic community in a note to clients late Friday.
Japanese Investor Behavior
Many Japanese investors utilize the Nippon Individual Savings Account (NISA) scheme to acquire foreign assets during risk-off periods, inadvertently slowing the pace of JPY appreciation. Additionally, the public pension system tends to go against the trend, rebalancing out of JPY assets.
This scenario, where a sharp appreciation of the JPY is followed by a pronounced sell-off in equities, is reminiscent of what happened last August.
If history repeats itself, this could trigger renewed risk-on sentiment for Nasdaq and Bitcoin. The USD/JPY pair turned up after the July and early August slide to 140, eventually rising to 158.50 by January. BTC also rebounded from the early August crash to $50,000, achieving new record highs above $108,000 in January.
At press time, Bitcoin traded near $80,300, reflecting a month-to-date decline of nearly 5%, extending February’s 17.6% slide. At one point early Tuesday, prices dipped to $76,800, according to CoinDesk data.
Meanwhile, the USD/JPY traded at 147.23, having reached a five-month low of 145.53 early Tuesday, as per TradingView data.
Temporary Respite?
While stretched bull positioning and institutional flows suggest potential relief ahead, these factors may do little to change the broader bullish outlook for the JPY, which is reinforced by a narrowing U.S.-Japanese bond yield differential.
Thus, risk asset bulls need to be vigilant for signs of volatility in the yen and the broader financial markets.
The spread between yields on the 10-year U.S. and Japanese government bonds has narrowed to 2.68% in a JPY-positive manner, reaching the lowest level since August 2022. This shift out of a macro uptrend suggests a major bullish shift in the JPY outlook.
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