Is Another ‘Black Monday’ Type Market Crash In The Making?

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The resurgence of the Japanese yen carry trade, which had a significant impact on stock and cryptocurrency markets worldwide, is being noticed as hedge funds and corporate clients start to re-engage with this popular strategy that involves borrowing low-yield Japanese yen to invest in high-yield assets. However, it remains unclear whether these trends are indicative of another major market collapse like the infamous Black Monday.

Black Monday Prospects As Yen Carry Trades Making A Comeback

Today, the Japanese Yen has softened, reaching approximately 149 Yen for every U.S. Dollar, marking a two-week low. This weakening is due to the US Dollar gaining strength in response to stronger-than-anticipated American economic reports.

It appears that Japan’s leading brokerage firm, Nomura Holdings, has revealed that investors are once more borrowing the Japanese yen in order to invest their funds in assets offering higher returns elsewhere. Notably, corporate clients and hedge funds have shown renewed interest in such transactions, according to a report by Bloomberg on August 16.

After the U.S. retail sales data surpassed expectations, there’s been a significant shift back towards carry trades, as stated by Antony Foster, head of Group-of-10 spot trading at Nomura in London. Furthermore, he mentioned that several accounts sold yen to purchase the Australian dollar and British pound.

1. The increase in U.S. bond yields occurred due to a decrease in economic worries caused by strong retail sales data, which boosted expectations for Fed rate cuts. This situation sparked an increase in carry trades as investors sought instant returns. Traders wagered billions of dollars that the yen would depreciate, before the currency unexpectedly strengthened last month.

In the last week, ATFX Global Markets, an Australian online forex broker, saw a significant increase of approximately 30% to 40% in short positions on the yen. This surge was primarily fueled by hedge funds and wealthy individual investors.

The deputy governor of the Bank of Japan, Shinichi Uchida, signaled that the central bank doesn’t intend to increase interest rates at this time because financial markets are volatile. Nevertheless, it remains undecided whether BOJ will lift rates in the coming year. The uncertainty will be resolved as Governor Kazuo Ueda addresses parliament on August 23.

As a crypto investor, I find myself closely watching Ueda’s dovish stance compared to Jerome Powell’s hawkish approach at the Fed. This difference in monetary policy could maintain high interest rate disparities between the US and Japan, potentially drawing me and other investors into carry trades. Yet, it’s important to remember that such a situation might also increase the risk of another devastating market crash similar to Black Monday.

“Mary Nicola, Markets Live Strategist, stated that many central banks worldwide are moving towards loosening their monetary policies, except for the Bank of Japan which will maintain low interest rates compared to other institutions. Consequently, the high-yield investment strategy known as ‘carry trade’ could regain popularity, assuming that stock markets and the Chinese currency continue to be steady.”

Arthur Hayes on How Crypto Market May React

Arthur Hayes, a co-founder of BitMEX, cautions that the financial market may gravitate towards high-risk trading strategies if the Bank of Japan (BOJ) and Federal Reserve (FED) prevent the spread between dollar and yen interest rates from shrinking. These risky trades could amplify market volatility and potentially trigger another crisis akin to Black Monday.

He says that Bitcoin price will increase in case either the currency system collapses or fiat liquidity chases assets with finite supplies. Meanwhile, hedge funds will continue to take benefit as long as the USD-Yen interest rate difference lasts.

BTC price paints a short-term bearish outlook after a 5% drop in a week, with the price currently trading at $58,324. The 24-hour low and high are $56,161 and $59,838, respectively. Furthermore, the trading volume has increased by 10% in the last 24 hours, indicating interest among traders. Bitcoin price risks falling to $54,000.

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2024-08-16 10:00