Bitcoin's correlation with dollar-yen rate hits -0.90, undercutting 'carry trade' theory

Bitcoin's BTC$59,255.62 price has been tracking the yen's exchange rate against the dollar unusually closely, dropping as the Japanese currency weakens. The behavior runs counter to the "carry trade" theory that suggests a strengthening yen could trigger risk aversion in the crypto market.

The 52-week rolling correlation coefficient between bitcoin's price in dollars on Coinbase (COIN) and the dollar-yen (USD/JPY) pair from currency markets has dropped to -0.90, the most negative reading since late 2022, according to data source TradingView.

A coefficient that low indicates a strong negative correlation, meaning the bitcoin price tends to fall when the exchange rate rises (that is, when the yen weakens), and vice versa. This implies that 81% of weekly BTC price changes track the USD/JPY rate.

The figures undermine the carry-trade narrative, which argues that a weaker yen is linked to a stronger bitcoin and other risk assets. For at least a decade, traders have borrowed cheaply in yen and invested in higher-yielding, riskier assets.

Extending that logic, a strengthening yen should trigger risk aversion in both stocks and cryptocurrencies. That's precisely what happened in July/August 2024, when the Bank of Japan (BOJ) raised interest rates, sending the yen sharply higher. Risk assets had a meltdown, with BTC falling to $50,000 from $65,000 in the following weeks.

Drive by the Fed

Carry-trade unwind fears have resurfaced lately as the yen slid, hitting four-decade lows this week. That's raised expectations of more aggressive action by the BOJ to stem the slide.

However, if the latest correlation is anything to go by, any BOJ action and a resulting rise in the yen could actually cut off bitcoin's decline, the opposite of what carry-trade logic would predict.

Correlation doesn't necessarily mean causation, even though statisticians often use the phrase "explained by" to describe the relationship.

In fact, it's likely neither bitcoin nor the yen is driving the other directly. Instead, broad dollar strength or weakness may be moving both assets independently, creating the appearance of a tight BTC-yen relationship.

Markets have recently priced in at least one 25 basis-point interest rate increase by the Fed this year. That hawkish repricing, a sharp reversal from earlier hopes of rate cuts, has lifted the dollar and a range of currencies including the euro, Australian dollar and New Zealand dollar as well as gold and silver.

Traders should keep that in mind before drawing firm conclusions from the BTC/USD and USD/JPY correlation alone.