bitcoin Traders may want to add the Japanese yen (JPY) to their list of related markets, going beyond the dollar index, as the connection between the cryptocurrency and the yen has hit a record high in the last 90 days.
The 90-day correlation coefficient between BTC and the Pepperstone JPY Index has risen to 0.86, the highest ever recorded, according to data source TradingView.
That high correlation means that the two assets have been moving in the same direction so strongly that 73% of BTC’s price swings over the last 90 days reflect yen movements. The 73% figure, known as the coefficient of determination, comes from squaring the correlation coefficient and shows the “goodness of fit” of a model as an intuitive percentage.
The Pepperstone JPY Index, known as JPYX, is a foreign exchange index contract for difference (CFD) that measures the strength of the Japanese yen against a basket of four major currencies: EUR, USD, AUD and NZD.
The close correlation between bitcoin and the yen means that the once independent BTC is now under the shadow of the Japanese currency’s swings, sinking or rising with the yen, as it has done over the past 90 days. In other words, for now, BTC appears to have lost its appeal as a portfolio diversifier, turning what was once a unique “digital gold” hedge into a double-down on the yen.
That said, traders should keep in mind that correlations between cryptocurrencies and traditional assets like stocks and currencies are often transitory.
BTC peaked in early October and took a beating in the following two months, as the JPY index extended its bearish trend, with sell-offs in both stalling after mid-December.
Furthermore, the yen has been in a bearish trend since April last year, as concerns about the sustainability of fiscal debt raised Japanese government bond yields. With a debt-to-GDP ratio of 240%, Japan is one of the most indebted nations in the world, although much of that debt is held by domestic investors.
Japan’s high debt traps its central bank between a rock and a hard place: Raising interest rates raises debt-servicing costs and worsens fiscal disarray, while keeping rates low risks an outright collapse of the yen.
Some observers argue that the fiscal crisis is already unfolding in currency markets, with the yen markedly weaker, and that only a potential recession in the United States will offer Japan respite.
