Bitcoin traders may want to add the Japanese yen (JPY) to their list of related markets and move beyond the dollar index as the cryptocurrency’s connection to the yen has hit an all-time high over the past 90 days.
The 90-day correlation coefficient between BTC and Pepperstone’s JPY index has risen to 0.86, an all-time high, according to data source TradingView.
The high correlation means that the two assets have moved in the same direction so tightly that 73% of BTC’s price swings over the past 90 days are reflected in the yen. The 73% number – known as the coefficient of determination – comes from squaring the correlation coefficient and shows a model’s “goodness of fit” as an intuitive percentage.
Pepperstone’s JPY Index, known as JPYX, is a currency index contract for difference (CFD) that measures the strength of the Japanese yen against a basket of four major currencies, the EUR, USD, AUD and NZD.
The close correlation between bitcoin and the yen means that the once-independent BTC is now under the shadow of Japanese currency swings, trending towards or rising with the yen, as it has done over the past 90 days. In other words, for now BTC seems to have lost its appeal as a portfolio diversifier, turning what was once a unique “digital gold” hedge into a doubled-down bet on the yen.
That said, traders should note that correlations between cryptocurrencies and traditional assets like stocks and currencies are often transitory.
BTC peaked in early October and took a beating in the following two months as the JPY index extended its downtrend, with sell-offs in both stalling after mid-December.
The yen has also been in a downward trend since April last year, as concerns about fiscal debt sustainability lifted Japanese government bond yields. With a debt-to-GDP ratio of 240%, Japan is one of the most indebted nations in the world, although much of this debt is owned by domestic investors.
Japan’s elevated debt catches its central bank between a rock and a hard place: A rise in interest rates raises debt-servicing costs and worsens the fiscal mess, while a low interest rate risks an all-out yen slide.
Some observers argue that the financial crisis is already unfolding in currency markets with a significantly weaker yen, and that only a potential US recession will give Japan a respite.
