The Japanese yen has been on a tear lately. Since July 11, the yen has surged by 5.2% against the US dollar. One major fallout from this is the unwinding of carry trades.
Investors often borrow in low-yielding currencies like the yen to invest in higher-yielding assets elsewhere. But as the yen strengthens, these trades are reversed, putting pressure on the dollar and other currencies.
The Bloomberg Dollar Spot Index, which tracks the dollar against a basket of major currencies, has dropped to its lowest level since May. It fell as much as 0.4% on July 17.
Lower-than-expected US Consumer Price Index readings have weakened the dollar, making the yen relatively stronger. There’s also speculation about changes in the Bank of Japan’s monetary policy, including potential interest rate hikes.
Also, there are rumors about possible intervention by Japanese authorities to curb the yen’s rise, though nothing concrete has happened yet.
Everyone’s on edge, watching for any moves.
Effects on global stocks
The yen’s strength isn’t just causing headaches for currency traders, it’s also hitting global stock markets. The Bloomberg Commodities Index has fallen 4.5% during the same period, hitting various commodities hard.
Copper is down 11%, aluminum 7.8%, and crude oil 4.7%. Tech stocks, often seen as market leaders, have also felt the pang. The “Mag7” group of major tech stocks has experienced significant sell-offs.
The Nasdaq even dipped into correction territory. Japanese exporters are in a tough spot too. A stronger yen makes their products more expensive abroad, potentially hurting sales and profits.
This could lead to underperformance in Japanese stock indices, which rely heavily on export-driven companies. Emerging markets aren’t escaping the yen’s influence either.
The Brazilian real and Chilean peso have both dropped 9% against the yen in just 12 sessions.
Effects on crypto
The crypto market, always a rollercoaster, is also feeling the effects of the yen’s strength. The yen’s rise and the dollar’s weakness could drive more money into crypto, as people look for alternatives to fiat currencies.
There’s also a correlation between traditional financial markets and crypto. When stocks get volatile, crypto often follows suit.
The tech stock sell-off, possibly linked to the yen’s strength, could mean more volatility in the crypto market. Arbitrage opportunities are another angle to consider.
With such currency movements, crypto traders, especially those dealing with yen-denominated exchanges, could find profitable opportunities.
USD-pegged stablecoins might also see increased demand from Japanese investors looking to capitalize on the yen. This could affect their market cap and overall usage.
