The Japanese Yen (JPY) is recording an increase in value against the US Dollar (USD), standing out from other fiat currencies amid early August market developments that saw major declines in global stock markets and Bitcoin (BTC) prices.
The yen has risen 2.4% since late Thursday to 145 yen per dollar, rebounding sharply from its August 5 low of 141.68. The rise reflects a renewed preference for “risk-off” currencies. Against the Australian dollar, a gauge of risk appetite, the yen has risen more than 1%, while also showing strength against the euro and sterling.
The moves in the foreign exchange market are a reminder of the yen's outperformance in late July and early August, when carry trades, or risk-on bullish bets, funded by relatively cheap yen loans, were canceled out as borrowing in yen became more expensive.
The risk-off in traditional markets has also put pressure on Bitcoin and the broader cryptocurrency market. BTC fell from around $70,000 to $50,000 in the eight days to August 5, before recovering to $60,000 alongside a recovery in the USD/JPY pair.
“The strength of the yen is creating a negative feedback loop as stops are triggered and excessive carry positions are unwound. This is a reshuffling of global risk asset positions,” noted prominent trader Simon Ree.
Andrei Kazantsev, head of crypto-focused trading at Goldman Sachs, echoed Ree, explaining that Bitcoin and Ether were caught in the yen carry trade and the global VAR shock on August 5. VAR (value at risk) measures the maximum loss a market can bear over a period of time. The sudden volatility forced traders to reduce their exposure to relatively risky assets.
“We believe that a significant decline in USD/JPY will have a material impact on expectations of future trends and therefore could influence trading behaviour. Changes in behaviour could lead to buying of the yen at lower prices, skewing risk to the upside,” ING said.
However, some observers predict that the carry trade unwind could continue in the near term, thanks to a boost from the US economy and the next Federal Open Market Committee (FOMC) interest rate meeting, scheduled for mid-September.
Arnim Holzer, global macro strategist at Easterly EAB Risk Solutions, shared:
“Fed Funds futures currently price in a 50% chance of a 50bp rate hike in September. However, we expect these odds to decline as we approach the FOMC meeting, given generally acceptable economic data. If the Fed does deliver a 50bp cut, the initial market reaction could be positive, but a sell-off could follow as concerns about the economy and yen strength fuel a carry trade unwind.”
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