To receive the Morning Note in your inbox, subscribe here: https://stormrake.substack.com/
Last year we saw the yen carry trade unwind when the Bank of Japan shocked markets and raised interest rates. A carry trade refers to borrowing a currency at a low interest rate and reinvesting it into a currency or asset that provides a higher return. When the BOJ unexpectedly raised rates, foreign investors scrambled to repay their borrowed yen by selling off the assets they had purchased using that debt. The resulting wave of selling led to a sharp market correction.
At the time, Bitcoin was trading just below its then all time high in the low $70K region before suffering a brutal 30% correction down to $49K within a week.
The gift and the curse of Bitcoin is that it trades 24/7, 365 days a year. You can always buy it, but you can also always sell it. So when events like these hit, Bitcoin tends to be the first victim. Investors rush to get liquid and often sell what they can access immediately as every other asset class has closed hours. Despite the panic, Bitcoin found a base at $49K and rallied again.
This event also saw the yen strengthen significantly against major currencies. USDJPY dropped from a 34 year high of 161 down to 140, a 15% rally for the yen over the next 11 weeks.
Now, while we haven’t seen another BOJ rate hike yet, Japanese bond yields are climbing. The 30 year yield is now at 3.31% its highest ever, while the 10 year sits at 1.73%, the highest since 2008. Rising yields mean borrowing costs go up, making the carry trade more expensive. Investors are again being forced to sell off assets to repay their yen loans.
BOJ Governor Kazuo Ueda has signalled more rate hikes may be on the way, with the next rate decision due mid December. Markets are currently pricing in a 50% chance of a hike, an outcome that would accelerate the unwind.
So far, the USDJPY pair hasn’t dropped as it did last year. It is currently sitting at 155. In fact, the yen has slightly weakened against the dollar. But analysts are projecting a move back to the 145 to 148 range if yields remain elevated into late 2025. If the BOJ hikes again or stays firm on policy, USDJPY could fall back to 140, marking the official unwinding of the carry trade.
As a result, non yield bearing assets have taken a step back across the board, regardless of whether they’re traditionally seen as risk on or risk off. The S&P 500 is down nearly 2% since the start of the week. Nasdaq is off over 2%. Gold is holding relatively sideways as it wrestles with the $4,000 level. Bitcoin is down just over 1.5%.
Keep in mind, the last time the yen carry trade unwound, Bitcoin dropped 30%. Bitcoin is now just shy of a 30% correction from its all time high. If this unwind plays out the same way, then it’s just a question of where you measure the 30% from, the all time high or recent levels.
If we do see a deeper correction from this unwind, it only opens the door for further accumulation of undervalued assets like Bitcoin.
Stormrake Spotlight: Hyperliquid (HYPE) ($38.71)
Stormrake Spotlight: Hyperliquid (HYPE) ($38.71)
