It may be a coincidence, but the recent decline in Nasdaq and Bitcoin (BTC) coincides with a sharp increase in Japanese government bond yields and strengthening the Japanese Yen (JPY), reminiscent of market dynamics seen in early August.
There may be a causal relationship here as the low return yen for decades supported global asset prices. The ongoing increase in the Japanese yen may have had a hand in the recent risk aversion on Wall Street and in the crypto market.
That said, the bullish looks positioning in the Japanese yen over the stretch, with speculators that have record lengths last week, according to CFTC data traced by macromicro. Such an extreme bullish positioning, which represents a collective belief in a continued feature higher in the asset, sets the stage for disappointment, as a lot of settlement of alongside down, leading to a quick bearish turn.
In other words, Yen’s increase could be stalled at the moment, offering exemption from risk assets, including Nasdaq and Bitcoin.
“We are now careful about chasing additional JPY strength, given stretched speculative positioning as well as strong dip-purchased appetite from domestic society,” Morgan Stanley’s G10 FX strategy team said in a note to clients late Friday.
Strategists explained that many Japanese investors use Nippon Individual Savings Account (NISA) scheme to appear foreign assets under risk-off, which inadvertently slows down the pace of JPY value. In addition, the public pension system tends to go against the trend and rebalans out of JPY assets.
“In fact, such a scenario happened in August last year after a sharp appreciation of JPY and the pronounced sale in shares,” the strategists remarked.
Let’s see if the story repeats itself and triggers a renewed risk-in mood for Nasdaq and Bitcoin. The USD/JPY pair appeared after slip in July and early August to 140 and eventually rose to 158.50 in January. BTC also emerged from early August down to $ 50,000 and rose to new record highs over $ 108,000 in January.
At press time, Bitcoin traded near $ 80,300, representing a decrease of month to date of almost 5%, extending February’s 17.6% slide. At one point early Tuesday, prices dipped at $ 76,800 according to Coindesk data.
Meanwhile, USD/JPY traded at 147.23, after setting a five -month low on 145.53 early Tuesday, TradingViewing data shows.
Temporary respite?
While the stretched bull positioning and institutional streams suggest relief ahead, these factors may do little to change the wider Bullish view of JPY, which is backed by a narrowing US-Japanese bond that makes a difference.
So the bulls’ bulls must be vigilant for signs of volatility in the yen and the wider financial markets.
The chart shows the spread between the yields on the 10-year-old American and Japanese government bonds.
The spread is narrowed to 2.68% in a JPY-positive way and reached the lowest since August 2022. Plus, it has dived out of a macro-up trend, suggesting a large bullish shift in the JPY prospects.
