Yen Intervention, Sovereign Repricing and the Bitcoin Setup

How US Intervention Could Impact the Yen Carry Trade?

Yesterday we covered what could unfold if the US intervenes to strengthen the Yen. This would involve the US government selling dollars to buy Yen, effectively boosting the Yen’s value. While there has been no official confirmation, price action in the USDJPY suggests markets are already pricing in intervention, as the Yen has started to rally. Historically, this has led to assets priced in USD moving higher, as covered in yesterday’s note.

But today, we need to highlight the downside risk, which is how the intervention may accelerate the unwind of the Yen carry trade. Yes, the Yen carry trade might feel overplayed at this point, but it remains a real and ongoing threat.

When the Yen strengthens against the dollar, those who borrowed in Yen to fund trades in risk assets are forced to unwind. These investors typically borrow Yen at low interest rates, convert it into dollars, and then use that capital to buy assets like US equities, bonds or Bitcoin. As the Yen rallies, the cost of repaying those Yen loans increases. To cover their positions, they are forced to de-risk by selling assets and buying back Yen, which creates broad selling pressure.

This is nothing new. Bitcoin has already felt the impact of Yen carry trade unwinds several times over the past 18 months. From surprise Bank of Japan rate hikes to record-level Japanese bond yields, each event brought downside pressure. But each time, Bitcoin has recovered and offered strong buying opportunities.

While the long-term thesis remains intact, sharp moves in the Yen can lead to short-term volatility for BTC and other risk assets. These periods of weakness often become ideal buying moments for those who stay alert. Those who take action during uncertainty tend to thank themselves later when prices are higher.

Macro Deep Dive: Dollar Debasement, Bond Yields and Bitcoin’s Role

The weakening of the USD is the cornerstone of our global currency debasement thesis. In this sense, nothing has changed for many years despite recent headlines. Yes - it’s possible this rare-occurance of a US intervention into the Japanese Yen may cause further uncertainty for the market, given that the USD dollar is weakening. It may even spark up fears again of another uptick in CPI inflation data for the US, potentially warranting higher interest rates for longer. In this scenario, the rapidly depreciating dollar will inversely put downward pressure on long-term US Treasury Bond prices as well, given the underpinning currency of said Bonds will be weakening.

This would feed into the already accelerating Bond yields that we’ve been observing, as these are inversely correlated to the Bond prices and directly affect interest rates. This feedback loop may accelerate the current re-pricing of sovereign assets, of which we expect Bitcoin to play catch-up once the dust settles, just like we’ve seen Silver do after being suppressed for well over a decade.

The last time we saw a significant US intervention of this scale into the Yen was during June of 1998. This was a time of extreme economic fragility on Japan’s behalf and was the consequence of a meteoric asset valuation bubble, fueled by global trade and manufacturing relations that couldn’t sustain itself. This led to a multi-decade bear market for the entire Japanese economy, commonly referred to as “the lost generation”. Upon the intervention, the USD nose-dived a whopping 10% in just three and a half months post-purchasing the Yen en-mass.

Those seasoned enough in the markets might recall what was rallying to astronomical valuations back home in the US at that time… that’s right - it was the Dot-Com bubble. Once the dust settled, tech stocks soared and the NASDAQ blew-off into a whopping +262% rally in following years ahead. Given the strong correlation between Bitcoin as an asset class and modern-day tech stocks; if investors can ride out the immediate uncertainty and volatility of Bitcoin’s price once again, they might just be rewarded in spades if history is to repeat itself.

The Case for Bitcoin as the Next Global Denominator:

Less than a week ago, we published a Morning Note titled ‘Repricing the World in Bitcoin’, which outlined the flaws in measuring asset prices through the lens of fiat currencies. Not just against other assets, but also in relation to everyday goods, and why a Bitcoin Standard should be seriously considered.

This potential US intervention in the Yen only adds weight to that argument. It highlights the risk of having a single country in control of the global reserve currency, able to shift monetary value in order to support another economy. Moves like this do not just affect Japan and the US. They directly impact every individual and institution holding US dollars.

Yes, asset prices may rise as the dollar weakens. But when everything is going up against the dollar, are you really outperforming, or is the global denominator simply losing value? In just the last eight days, the DXY index has dropped nearly 4%, meaning the dollar has fallen against a basket of other major currencies.

This could be one of the final catalysts in the decline of the USD as the global pricing unit. It strengthens the case for Bitcoin as a neutral and decentralised denominator that cannot be adjusted at the whim of any government.

If that transition continues, we may see every asset rally in USD terms. But the real signal of outperformance will come from how assets perform relative to each other. For those who believe Bitcoin is the next global reserve currency and monetary benchmark, the opportunity to act is already here.

Stormrake Spotlight: Pax Gold (PAXG) ($5,209)

PAXG climbed another 3% yesterday as the threat of intervention grows and uncertainty in global markets increases. Now trading above $5,200 an ounce, momentum remains strong and the move is showing no signs of slowing…

BTC/USD Key Levels and Price Action:

Bitcoin continues to hover in the middle of the consolidation range, currently at $89,000 and just above the key level of $88,888. Until either side of the range is broken, price action is likely to remain sideways.

BTC Total ETF Flows for 27 Jan: (data not available at the time of writing)

*All prices are denominated in USD unless stated otherwise*

Written by Alexandar Artis and James Ryan

Create a brokerage account today

No Advice Warning

The information in this newsletter is general only. It should not be taken as constituting professional advice from the author - Stormrake PTY LTD.

Stormrake is not a financial adviser and does not provide financial product advice. You should consider seeking independent legal, financial, taxation or other advice to check how the information relates to your unique circumstances. Stormrake is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by this newsletter.

Disclaimer

All statements made in this newsletter are made in good faith and we believe they are accurate and reliable. Stormrake does not give any warranty as to the accuracy, reliability or completeness of information that is contained here, except insofar as any liability under statute cannot be excluded. Stormrake, its directors, employees and their representatives do not accept any liability for any error or omission in this newsletter or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise specified, copyright of information provided in this newsletter is owned by Stormrake. You may not alter or modify this information in any way, including the removal of this copyright notice.