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

Japanese yen carry trade that crashed stock and crypto markets globally is making a comeback. Hedge funds and corporate clients are gradually getting back to using popular Japanese yen-focused carry trade to invest proceeds into high-yield assets. Are these early signs of another Black Monday?

Black Monday Prospects As Yen Carry Trades Making A Comeback

Japanese yen has weakened to 149 per US dollar today, hitting a two-week low as the US dollar strengthened on better-than-expected US economic data.

Japan’s biggest brokerage firm Nomura Holdings disclosed that investors have started borrowing the Japanese yen again to invest these funds elsewhere in higher-yielding assets. Especially, corporate clients and hedge funds are making a comeback into these deals, Bloomberg reported on August 16.

“There has been a notable move back” into carry trades after US retail sales data beat estimates, said Antony Foster, head of Group-of-10 spot trading at Nomura in London. He also added that multiple accounts sold yen to buy the Australian dollar and sterling.

US bond yields rose as the retail sales data eased economic concerns and fueled Fed rate cut expectations. This led to carry trades mounting as investors look for quick profits. Traders bets billions of dollars that the yen would weaken, before the currency jumped last month.

Australian online forex broker ATFX Global Markets witnessed a nearly 30% to 40% rise in yen shorts in the past week, with bets majorly driven by hedge funds and high-net-worth investor clients.

BOJ Deputy Governor Shinichi Uchida indicated that the central bank won’t raise interest rates currently as financial markets are unstable. However, it’s still unclear if BOJ plans to raise rates next year. Traders will get clarity as BOJ Governor Kazuo Ueda is due to speak before parliament on Aug 23.

If Ueda remains dovish while Fed Chair Jerome Powell appears hawkish, that should keep interest rate differences between the US and Japan elevated, attracting more investors to enter carry trades. However, it also risks another Black Monday market crash.

“Global central banks are now shifting toward easing, barring the BOJ which will still keep rates low relative to peers. That means the carry trade is poised to make a comeback, provided that equity markets and the Chinese currency remain stable,” said Mary Nicola, Markets Live Strategist.

Arthur Hayes on How Crypto Market May React

BitMEX co-founder Arthur Hayes warns that the market will focus on high-leverage trades if the BOJ and FED won’t allow the dollar-yen interest rate differential to narrow. High-leverage trades can make markets volatile and vulnerable to another stock and crypto market crash similar 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 carry trade benefits as long as the USD-Yen interest rate difference lasts. The crypto market today also relies heavily on leverage for trading.

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.