Bitcoin's 52-week correlation with USD/JPY hits -0.90, undercutting 'carry trade' theory

Bitcoin's BTC$59,501.13 price has been tracking the dollar-yen (USD/JPY) exchange rate unusually closely. The direction of that relationship undercuts the popular "carry trade" theory that suggests yen strength could trigger risk aversion in the crypto market.

The 52-week rolling correlation coefficient between Coinbase's BTC/USD pair and the USD/JPY pair from the currency markets now stands at -0.90, according to data source TradingView. That's the most negative reading since late 2022. Squaring that figure gives an R2 of about 0.81, meaning roughly 81% of the weekly variation in BTC/USD can be statistically explained by movements in USD/JPY.

A coefficient of -0.90 indicates a strong negative correlation: BTC/USD tends to fall when USD/JPY rises, and vice versa. Since USD/JPY rising reflects yen weakness, that means BTC and the Japanese yen have tended to move in lockstep against the dollar, both strengthening together, or both weakening together.

For context, correlations between BTC and major FX pairs are typically weak and unstable, often drifting between -0.3 and +0.3 depending on the window measured. A reading of -0.90 over a rolling 52-week period is rare on its own and worth a closer look.

Why this undercuts the usual carry trade narrative

The dominant carry-trade narrative linking yen moves to crypto and other risk assets has generally run the other way. For at least a decade, traders have borrowed cheaply in yen and invested in higher-yielding assets elsewhere.

Under the "yen carry trade" framework, a weak yen (USD/JPY rising) is supposed to be accompanied by rising BTC, just as it tends to support stocks. Extending that logic, a strengthening yen should trigger risk aversion in both stocks and cryptocurrencies.

That's precisely what happened in late July/early August 2024, when the Bank of Japan hiked interest rates, sending the yen sharply higher. Risk assets had a meltdown, with BTC falling from roughly $65,000 to $50,000 in the following weeks.

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

However, if the latest correlation is anything to go by, potential BOJ action and a resulting rise in the yen could actually put a floor under BTC, working the opposite way from what carry-trade logic would predict.

A mirage?

Correlation doesn't necessarily mean causation.

Neither BTC nor the yen may be driving the other directly. Instead, broad US dollar strength or weakness may be moving both assets independently, creating the appearance of a tight BTC-yen relationship.

That reading makes sense in context: markets have recently priced in at least one 25-basis-point interest rate hike from the Fed this year. That hawkish repricing, a sharp reversal from earlier hopes of rate cuts, has lifted the dollar broadly. The euro, the Australian dollar, the New Zealand dollar, gold and silver have all declined against the greenback over the same stretch.

Traders should weigh that caveat before drawing firm conclusions from the BTC/USD and USD/JPY correlation alone.