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Limit to Yen rally after BOJ disappoints
Limit to Yen rally after BOJ disappoints. The Japanese Yen rallied over 3% against the US Dollar after the Bank of Japan’s (BOJ) latest policy decision to ‘stay the course’ with its current stimulus stance and nearly 10% ytd. Such a policy decision is refreshing.
It seems that foreign Japanese investors’ and firms are losing faith with the economic management of the country and reacting by hedging foreign exposures against adverse Yen movements With ongoing concerns over inflation and with the Fed beginning its tightening cycle.
Decades of low inflation and weak growth have rendered policymakers ineffective in the eyes of investors and burgeoning local savings have moved offshore in search of better returns. Offshore markets provided returns but the Yen’s safe haven characteristic, a stronger local currency can offset better offshore returns. IMF research asserts that the stronger Yen is likely due to a ‘portfolio rebalancing through derivative positions’, which is to say domestic foreign positions being hedged against adverse Yen movements. Limit to Yen rally after BOJ disappoints
Unconventional policy
Unconventional policy does need to be deployed in Japan and perhaps the key reason is hidden in its December monetary policy statement. The BOJ speaks of the ‘conversion of firms’ and households’ deflationary mindset has been progressing’, which is key to raising inflationary expectations and in turn achieving the inflation target. So the BOJ feels its policy is working and that its move to negative interest rates can assist the ‘progress’.
While the market appears to be losing faith in the BOJ, the central bank appears to be committed to its unconventional policy and wants to see it work its way through the economy given time. Indeed, it was only in January that negative rates were implemented and monetary policy has a lagged impact. Japanese companies clearly hedge their foreign operations, whether that be trade or investment related. It is for this reason that central bank policy needs to be independent of market expectations and shouldn’t be concerned about the day-to-day gyrations of the local currency. The BOJ was right to ignore the market’s expectations for policy. Such a policy decision is refreshing in the light of the US Fed being swayed by market angst and potentially trapping itself in a dangerous policy spiral , which is based on the markets’ view and not fundamentals.
Nonetheless, we expect more stimulus in 2016 to come from the BOJ, and with the Fed tightening, we feel this knee-jerk rally to the latest policy move is limited.
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Martin Arnold, Global FX & Commodity Strategist at ETF Securities
Martin Arnold joined ETF Securities as a research analyst in 2009 and was promoted to Global FX & Commodity Strategist in 2014. Martin has a wealth of experience in strategy and economics with his most recent role formulating an FX strategy at an independent research consultancy. Martin has a strong background in macroeconomics and financial analysis – gained both at the Reserve Bank of Australia and in the private commercial banking sector – and experience covering a range of asset classes including equities and bonds. Martin holds a Bachelor of Economics from the University of New South Wales (Australia), a Master of Commerce from the University of Wollongong (Australia) and attained a Graduate Diploma of Applied Finance and Investment from the Securities Institute of Australia.
Recent market movements reinforce the investment case for crypto index investing and we believe that now is the time to build a long crypto exposure via the Nasdaq Crypto Index (NCI) (or to boarden the exposure vs. a single asset Bitcoin ETF position).
Here are some commentaries from our Research:
• NCI surges +18% last week (Nov 3 to 10) while Bitcoin was up +15%: driven by market optimism following Trump’s election and a 25 bps rate cut by the Federal Reserve
• Bitcoin breaks new highs: Closed the week above $80k for the first time, leading a market rally
• Outperformance across NCI constituents:
o Smart contract platforms led gains:
Cardano: +72.6%
Avalanche: +31.4%
Ethereum: +27.2%
Solana: +25.4%
o All constituents (except LTC) outperformed Bitcoin’s gains, see below for last week:
• BTC Dominance tested 60% and retraced: Historically, this has either signaled the end of Bitcoin outperformance or the start of a powerful Altseason
• Strong performance outlook: Momentum in NCI’s broad diversification positions it well for potential long-term gains as macro and regulatory conditions improve
Nasdaq Crypto Index – Constituents performance Nov 3 – Nov 10:
Evolution of Bitcoin dominance:
Why consider Nasdaq Crypto Index (NCI) now?
• Diversification beyond Bitcoin: Capture both Bitcoin’s strength and the upside potential of emerging crypto assets in one allocation.
• Positioning for Altseason: NCI provides targeted exposure to key market segments poised to benefit from broader market growth.
• Current allocation:
One week after the US elections, bitcoin has been hitting new all-time highs. This price action reflects the fact that the results were an ideal outcome for bitcoin and other crypto assets—with both a pro-crypto president and Congress set to take the reins of the US government in January.
The support for crypto was overwhelming. There were 268 Congressional candidates and 19 candidates for the Senate that were elected and are considered pro-crypto, according to Stand with Crypto. This included the election of 50 of 58 candidates supported by the crypto industry.
But with change coming in 2025, what can investors take away from last week’s results? I think there are three things we know with certainty.
- Crypto will continue to be a political force: The election outcome might be the strongest signal we have seen that crypto is an asset class here to stay given the pro-crypto stance of President-elect Trump and many newly elected policymakers. Trump has supported big and bold ideas in this space, including supporting the US holding bitcoin on its balance sheet and the creation of a crypto advisory council to create supportive rules for the industry.
But this election will have an impact far beyond last week’s results. The engagement from the crypto community and industry in this election will reverberate into the next elections and those that follow, as policymakers are now grasping that—like the internet—crypto is a technology that should not be caught up in partisan politics. There were already signs of bipartisan support for the industry this year, but with such a definitive victory for pro-crypto candidates, both Democrat and Republican, the idea that Congress should try and stop this technology from being incubated in the US has faded away.
- The “generational shift” is happening: While there has been more support for crypto from Republicans than Democrats, I think this is a short-term dynamic that will not persist over time. What might be more important is the generational shift taking place, as younger generations of politicians embrace crypto while older generations remain skeptical. It’s not surprising that the most vocal critics of crypto tend to be relatively older, including Sen. Elizabeth Warren (75), Sen. Sherrod Brown (72), and Rep. Brad Sherman (70), while those who are embracing this technology—regardless of party affiliation—are much younger, including incoming US senators Tim Sheehy (38), Ruben Gallego (44), and Bernie Moreno (57). Over time, this generational gap might even become a more important distinction than partisan lines on this issue.
- It’s still early: Even with bitcoin’s rise over $82,000 this week, this is an asset class that is still in its early stages of adoption. Many investment advisors, wealth managers, and large institutional investors are still conducting their due diligence, and we think the political and regulatory environment next year will help them accelerate these efforts.
But we are still so early. And, given the cyclicality of this asset class, there is tremendous potential for this current environment being an excellent entry point. For example, one year after the 2016 and 2020 elections, bitcoin had returned 916% and 354%, respectively.
This performance tracks well with post-halving performance as well as favorable macro factors, such as lower interest rates in the US and economic stimulus in China increasing global liquidity and benefiting risk assets. These factors, along with the ongoing institutional adoption and a dramatically improving regulatory outlook in the US is setting crypto up for a very strong 2025.
Crypto is the election’s big winner
The new administration, together with a Congress more crypto-friendly than any other point in history, is poised to act quickly to ensure that the US maintains its leadership in digital assets. While there will be many uncertainties in the coming weeks and months regarding specific policies and personnel, we are clearly at an inflection point. Crypto has made its case to US policymakers and they have embraced it with open arms. This is a key factor setting 2025 up for what we believe will be an incredible year for this space.
For investors thinking about how to act based on the election results, we continue to advocate for taking a long-term view and getting diversified exposure to this asset class. We’ll continue to face uncertainty and volatility, but investors who maintain an extended horizon will benefit, just as they have in the past.
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