(Kitco News) – Tuesday was a rebound day for financial markets following the market-wide selloff that occurred on Monday after the unwinding of the yen carry trade, which had been a reliable source of alpha for decades.
“The BoJ (Bank of Japan) had extremely low rates for decades and the yen was essentially down-only against the dollar over the past few years,” explained market analyst Bloodgood. “As a result, an easy way to print money was to borrow yen, sell it for USD, and then invest the USD into bonds or stocks. Even by just putting the dollars into treasuries, you’d be earning the interest rate differential by paying 0.1% on your yen loan while earning upwards of 4% on USD.”
“What’s more, since the yen was almost guaranteed to keep losing value, you’d also earn more from the price drop: when, later on, you want to close the trade and buy back the JPY, you’ll have to pay less USD than you got when you sold it,” he added.
After highlighting that there was a lot of capital taking advantage of this process and magnifying the gains with leverage, Bloodgood noted that on Wednesday, the BoJ decided to hike rates to 0.25%, “after the yen had already bounced back a bit against the dollar.”
“Coupled with recession fears in the U.S. which put downward pressure on bond yields – thus making the carry trade less profitable – this led to the yen pumping almost 15% from its July low against the dollar,” he said. “What does this do to the carry trade? Well, three things happen simultaneously: (1) the trade becomes less profitable due to the rate differential narrowing, (2) the yen loan becomes much more expensive as (3) the USD loses value.”
“In a word: rekt,” Bloodgood said. “Funds have to unwind fast and they have to sell other assets (primarily stocks) to cover their positions, which leads to the sort of chaos we’ve seen.” This, combined with an increase in recession fears following the release of the weaker-than-expected jobs report on Friday pushed the markets into panic mode, he said.
X user Michael Burry Stock Tracker provided additional context, noting, “Massive institutions were involved in these carry trades and the BOJ balance sheet is vastly larger than the country’s GDP, at 127.5% of GDP.
“The Fed’s balance sheet is only 25% of GDP,” he said. “The BOJ balance sheet has about 5x more influence on their market. This massive fall in the Asian markets has had a ripple effect throughout the entire world.”
But markets love a good comeback story, and just as prices improved (for a time) following the ‘Black Monday’ experienced by the Nikkei in 1987, MN Trading founder Michaël van de Poppe thinks another surge to new highs is coming before the “big crisis” takes place.
The Nikkei Index witnessed Black Monday in 1987.
What happened after?
The markets quickly bounced up and had 2 more years of fun until the big crisis in Japan took place.
The same is likely going to happen in the U.S.
I'm happy to be long in #Crypto. pic.twitter.com/drCP7hau4X— Michaël van de Poppe (@CryptoMichNL) August 6, 2024
Traders comfortable with taking risks used the pullback to buy the dip, leading to gains for stocks and cryptos, though prices are still well below where they were before the sell-off.
At the close of markets on Tuesday, the S&P, Dow, and Nasdaq all finished higher, up 1.04%, 0.76%, and 1.03%, respectively. Gold fell 0.63% as demand for safe havens diminished, and silver prices saw a decline of 0.39%.
Data provided by TradingView shows that Bitcoin (BTC) climbed from support at $54,000 to hit a high of $57,100 on Tuesday, regaining support at the lower end of the range it has been trading in since late February.
BTC/USD Chart by TradingView
At the time of writing, Bitcoin trades at $56,540, an increase of 5.11% on the 24-hour chart.
The need to regain support at $59k
“A lot has changed in the last two weeks,” Bloodgood said. “If we were previously discussing whether BTC would break $69k, we are now looking to see if the $51k level will hold. Bitcoin has dropped 30% in the last two weeks due to the turmoil in the stock market.”
“However, the fundamental part doesn’t interest us in this section; here we are looking at the charts,” he added. “The bottom was formed slightly below $50k, and a bounce is in process. If we want to see continuation soon, we will need BTC to close its weekly candle above the key weekly level at $59k. If not, we might see sub-$50k levels soon.”
“Since Bitcoin failed to make a higher high on the weekly, we now have three lower highs and three lower lows, indicating that we are still in a downtrend,” Bloodgood said. “Until that changes, I am not comfortable looking for longs and will keep waiting until the trend shifts.”
“Similarly to BTC, ETH needs to reclaim $2,600, which was the breakout level that led ETH to $4k. If that doesn’t happen, we might just see it test $2k,” he warned. “On the other hand, breaking above that level would lead ETH to $2,800 and then $3,300.”
Bloodgood also touched on the fundamental development of politicians like Donald Trump, Robert F. Kennedy Jr., and Senator Cynthia Lummis (R-WY) promising to make Bitcoin a strategic reserve asset, noting that Democrats “seem to be warming up to” crypto as well “with a growing wing of the party pressuring the leadership to adopt a more pro-crypto stance – hardly a surprise given that 20% of voters in battleground states named crypto as a key issue in the 2024 election.”
“Whether and to what extent the Dems (or Trump, for that matter) follow up on their promises remains to be seen, but it’s clear that crypto is long past the stage of being a fringe issue,” Bloodgood concluded.
Altcoins see double-digit recovery
While altcoins tend to experience larger percentage pullbacks when Bitcoin’s price falls, they also see outsized returns once prices rebound, and Tuesday was no exception, with only two (non-stablecoin) tokens in the top 200 recording losses.
Daily cryptocurrency market performance. Source: Coin360
Meme token cat in a dogs world (MEW) saw the strongest bounce back, gaining 39.8% to trade at $0.00568, while Notcoin (NOT) climbed 30%, and AIOZ Network (AIOZ) increased by 27.9%.
The overall cryptocurrency market cap now stands at $2 trillion, and Bitcoin’s dominance rate is 55.9%.
