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Earlier this month, a similar surge in the yen led to an unwinding of carry trades and shook risk assets, including cryptocurrencies. 
The FX market is showing a renewed preference for the Japanese yen, a currency often sought during times of risk aversion. Earlier this month, a similar yen outperformance triggered a reversal of carry trades and unsettled risk assets, including cryptocurrencies. Some analysts are concerned that we could see another round of carry trade unwinding soon. 
The Japanese yen (JPY) is gaining strength against the U.S. dollar (USD) and outperforming other major currencies, echoing the market moves seen in early August when global stocks and bitcoin (BTC) experienced significant declines. 
Since late Thursday, the yen has appreciated by 2.4% against the dollar, reaching 145 per USD and reversing its weakening trend since the Aug. 5 low of 141.68. This suggests a renewed preference for the yen as a safe-haven currency. The yen has also strengthened by over 1% against the Australian dollar, a key indicator of risk appetite, and has shown even greater gains against the euro and British pound. 
The current activity in the foreign exchange market is reminiscent of the yen’s strong performance at the end of July and early August, which triggered the unwinding of carry trades. These are risk-on positions funded by borrowing yen at low interest rates, which became more expensive as the yen appreciated. 
The reduction in risk exposure in traditional markets also negatively impacted bitcoin and the broader crypto market. BTC dropped from around $70,000 to $50,000 in the eight days leading up to Aug. 5, before recovering to $60,000 alongside a rebound in the USD/JPY pair. 
Yen strength is creating a negative feedback loop, triggering stop-loss orders and unwinding overextended carry trades, which is unsettling global risk assets, noted renowned trader Simon Ree on X (formerly Twitter). 
Andrei Kazantsev, head of Goldman Sachs’ crypto-linked trading desk, echoed these concerns, explaining how bitcoin and ether were caught up in the yen carry trade unwind and the broader value-at-risk (VAR) shock on Aug. 5. VAR measures the maximum potential loss a market can sustain over a given period. When VAR suddenly increases, traders tend to reduce their exposure to riskier assets. 
Given the renewed strength of the yen, crypto traders should take notice. According to ING, the yen’s rally from 161 to 141.68 per dollar in the three weeks leading up to Aug. 5 has set the stage for continued yen buying during pullbacks. 
A 20-point drop in USD/JPY could significantly impact expectations for future market direction, leading to more frequent yen buying at weaker levels and potentially reinforcing a strengthening trend, ING said in a note to clients on Aug. 16. 
However, some analysts warn that the unwinding of carry trades could resume in the coming weeks, driven by developments in the U.S. economy and the upcoming Federal Open Market Committee (FOMC) meeting in mid-September. 
Fed funds futures currently indicate a 50% chance of a 50-basis point rate hike in September, but we expect these odds to decrease as we approach the FOMC meeting due to generally stable economic data. If the Fed cuts rates by 50 bps, we anticipate an initial positive market reaction, followed by a sell-off as concerns about the economy and yen strength reignite the unwinding of carry trades, Arnim Holzer, global macro strategist at Easterly EAB Risk Solutions, said in an email.

Bitcoin Traders, Take Note: The Japanese Yen Is on the Rise Again

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