Is a New ‘Black Monday’ Market Crash Looming?

Written by W, Leah

Last updated: 2024-08-16

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Is a New 'Black Monday' Market Crash Looming?

Japanese yen carry trade, which once crashed stock and crypto markets worldwide, is staging a comeback. Hedge funds and corporate clients are slowly returning to this popular yen-centered strategy, investing proceeds into high-yield assets. Are these early signs of another Black Monday?

Black Monday Prospects As Yen Carry Trades Making A Comeback
Arthur Hayes Discusses Potential Crypto Market Responses

Black Monday Prospects As Yen Carry Trades Making A Comeback

Today, the Japanese yen has depreciated to 149 against the US dollar, marking a two-week low, as the greenback strengthened on positive economic indicators surpassing market Predictions.

Nomura Holdings, Japan’s prominent brokerage, has revealed that investors are once again leveraging the yen to fund investments in higher-yielding assets. Notably, corporate entities and hedge funds are re-entering these transactions, as reported by Bloomberg 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.

As retail sales data alleviated economic concerns and bolstered anticipations of Fed rate cuts, US bond yields climbed, prompting investors to seek quick gains through carry trades. Prior to last month’s yen surge, traders wagered billions of dollars on its weakening.

ATFX Global Markets, an Australian online forex broker, observed a substantial increase of 30% to 40% in yen short positions over the past week, primarily fueled by hedge funds and high-net-worth investors.

BOJ Deputy Governor Shinichi Uchida emphasized that the central bank will maintain its accommodative stance amid financial market volatility, leaving uncertainty over potential rate hikes next year. Clarity is expected when BOJ Governor Kazuo Ueda addresses parliament on August 23.

If Ueda maintains a dovish stance while Fed Chair Jerome Powell signals a hawkish outlook, the interest rate differential between the US and Japan could widen, enticing more investors into carry trades. However, this scenario also poses the risk of a market crash akin to Black Monday.

“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.

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Arthur Hayes Discusses Potential Crypto Market Responses

Arthur Hayes, co-founder of BitMEX, cautions that the market could gravitate towards highly Leveraged transactions if the Bank of Japan (BOJ) and Federal Reserve (Fed) refrain from narrowing the dollar-yen interest rate differential. Such leveraged trades could heighten market volatility and potentially trigger another market downturn reminiscent of Black Monday.

Hayes predicts that Bitcoin’s price will surge if the traditional currency system were to collapse or if fiat liquidity seeks refuge in assets with limited supplies. Meanwhile, hedge funds are poised to continue capitalizing on the enduring USD-Yen interest rate disparity.

Currently, Bitcoin’s (BTC) price presents a short-term bearish picture, following a 5% weekly decline, with the token 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.