On Monday morning, the crypto market was a sea of red as most assets dropped sharply. Bitcoin’s price has dropped by 20% in the past seven days to $54,725, while JasmyCoin (JASMY) has retreated by over 35% in the same period. Other meme coins like Dogwifhat (WIF), Pepe, and Shiba Inu slumped by over 30%.
US recession odds are rising
Cryptocurrencies are not the only assets in trouble; stocks are also not doing well. In the United States, the Dow Jones futures dropped by over 300 points on Monday, continuing the sell-off we saw on Friday when it fell by 610 points. The Nasdaq 100 index fell by over 417 points.
Other global stocks are not doing well. On Monday, the Nikkei 225 and the Topix indices plunged by over 7%, while in South Korea, the Kospi fell by 4.5%.
Traders have identified several reasons behind the ongoing crypto and stocks plunge. For example, some have pointed to the ongoing recession odds in the US, with Goldman Sachs raising its probability odds during the weekend.
These fears accelerated on Friday after the US published weak economic numbers that revealed the labor market softened in July. The economy added just 114k jobs in July, its lowest increase since 2022, while the unemployment rate rose to 4.3%. Other data, like the ISM manufacturing PMIs and retail sales, have pointed to a recession.
Japanese yen comeback
However, the most likely reason stocks and cryptocurrencies are plunging is the Japanese yen’s comeback. The USD/JPY pair has slumped in the past five consecutive days, reaching a low of 145.15, its lowest point since January this year. It has now moved into a correction, as it dropped by over 10% from its highest point this year.
The Japanese yen’s comeback continued after the Bank of Japan (BoJ) hiked interest rates by 0.25% last week. With Japan hiking rates and the US set to slash rates in September, the spread between US and Japanese government bonds has narrowed substantially in the past few months, and this trend could continue.
As a result, traders are now unwinding an attractive carry trade that has existed for many years as Japan interest rates have remained at historic lows. This carry trade involved borrowing the cheaper yen to invest in the higher-yielding US and Australian markets.
The unwinding of the carry trade has led to intense fear in the stocks and crypto market. The fear and greed index has dropped to 27 and will likely move to the extreme fear zone of 27. In most cases, assets like Jasmy, Bitcoin, Pepe, and Shiba Inu retreat when there is a sense of fear in the financial market.
