Bitcoin Drops More Than 10% Due to Rapid Appreciation of Japanese Yen and Carry Trade Liquidation
The crypto market has recently been shaken by a significant drop in Bitcoin, particularly notable on exchanges denominated in Japanese yen. The Bitcoin/yen pair on Kraken saw the price of BTC fall by over 30% in a week, a sharper decline than the approximately 24% drop against the US dollar on Western exchanges.
This difference is attributed to the rapid appreciation of the Japanese yen.
Rise of the Yen and Carry Trade Liquidation
The Japanese yen has experienced a sharp increase, rising almost 10% against the US dollar in just three weeks. This rapid appreciation follows an interest rate hike by the Bank of Japan.
As a result, traders have begun to close their carry trades, a strategy that involves borrowing at a low interest rate to invest in higher-yielding assets. This wave of trade liquidation has contributed to the massive sell-off of risky assets, including cryptocurrencies.
Increase in Trading Volume and Geopolitics
The surge in the yen has caused a significant increase in trading volume on the Bitcoin/yen pairs, with volume on bitFlyer, a Tokyo-based platform, experiencing a 241% increase in 24 hours, with transactions surpassing $220 million.
If the interest rate hike in Japan has strengthened the yen’s appeal, triggering a massive sell-off of risky assets, cryptocurrencies are not the only affected assets. Japan’s Topix 100 index recorded its worst session since 2011, and the Nikkei 225 dropped by 12.4%. The Nasdaq and S&P 500 are down by 4.7% and 3.2% in pre-market trading, as major companies like Amazon, Apple, and Microsoft could experience significant drops.
These declines have worsened the situation in Asian markets, spreading to cryptocurrencies and increasing liquidations on crypto futures contracts, which exceeded $1 billion in 24 hours.
Treasury Yields Foreshadowing a Recession?
Treasury yields are “normalizing” as traders increase their bets on an interest rate cut. The 10-year Treasury bond yields surpassed those of the 2-year bonds on Monday for the first time since July 2022, as traders multiplied their bets on the Federal Reserve’s upcoming interest rate cut.
2-year yields have been higher than 10-year yields for years, a phenomenon known as an “inverted yield curve”, as the Fed has maintained interest rates at their highest level in 23 years. But this trend finally reversed on Monday morning, with the weakness in the jobs report on Friday signaling to traders that the Fed would soon start easing its monetary policy.
The “inversion” of the yield curve is a precursor to recession within a timeframe of six months to two years, and the normalization of the curve usually occurs shortly before the recession hits…
