The Japanese yen (JPY) is strengthening against the US dollar (USD), outperforming other fiat currencies, recreating market trends that saw global equities and Bitcoin (BTC) fall sharply in early August. Some observers worry that the recent unwinding of the yen carry trade may be repeated in the market.
The yen has risen 2.4% to 145 yen against the dollar since late Thursday, halting a weak rebound from a low of 141.68 on August 5 and signaling a renewed appetite for the "risk-resistant" currency. look up. The Japanese yen has risen more than 1% against the Australian dollar, a barometer of risk appetite. The yen was stronger against the euro and pound.
Activity in currency markets was reminiscent of the yen's strength in late July and early this month, which catalyzed the unwinding of carry trade positions as borrowing the yen became more expensive. The resulting reduction in exposure to traditional markets also weighed on Bitcoin and the broader cryptocurrency market, with Bitcoin falling from around $70,000 to $50,000 in the eight days to August 5 before rebounding in USD/JPY while rising back to $60,000. Well-known trader Simon Ree said on the X platform at the time:
"The stronger yen is triggering a negative feedback loop as stops are triggered and overextended carry positions are unwound, which is disrupting the positioning of global risk assets."
Andrei Kazantsev, head of Goldman Sachs’ crypto-related trading desk, echoed Ree’s sentiments in his latest comments, explaining how Bitcoin and Ethereum (ETH) are affected by yen carry trade unwinding and global value at risk (VAR) on August 5 impact of shock. VAR refers to the maximum amount of loss that the market can tolerate within a certain period of time. A sudden jump will force traders to reduce their exposure to relatively high-risk assets.
Therefore, renewed strength in the yen is worth keeping an eye on for cryptocurrency traders. The yen rebounded from 161 to 141.68 in the three weeks to August 5, a move that has set the tone for bargain hunting in the yen, according to ING.
“We believe a 20-digit decline in USD/JPY will have a meaningful impact on expectations for future direction, and thus potentially affect behavior,” ING said in a note to clients on August 16. "It could mean there is greater willingness to buy when the yen weakens, tilting the risk towards strength."
Some observers say the unwinding of carry trades could resume in the coming weeks, spurred by the U.S. economy and the Federal Open Market Committee's (FOMC) next rate-setting meeting, scheduled for mid-September. Arnim Holzer, global macro strategist at Easterly EAB Risk Solutions, said in an email:
“FFFs (Federal Funds Futures) currently forecast a 50% chance of a 50 basis point rate hike in September; however, as economic data is generally acceptable, we expect these odds to decrease as the FOMC meeting approaches. However, If the Fed cuts interest rates by 50 basis points, we think the initial market reaction will be positive, but then there may be a sell-off as concerns about the economy and the strength of the yen will bring about the return of carry trade unwinding.”
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