This week, the focus of global financial markets is on the interest rate decisions of the Bank of Japan (BOJ) and the Federal Reserve (Fed). Although market expectations are relatively consistent, any news that exceeds expectations may become a bombshell for the market.
The policy decisions of these two central banks will not only affect the economies of their respective countries, but will also have a profound impact on global financial markets, capital flows and exchange rates.
The whole story: The two major financial powers, the United States and Japan, began to adjust their financial policies
The Federal Reserve’s monetary policy history:
Since 2022, the Federal Reserve has adopted a series of interest rate hikes to cope with the continued rise in inflationary pressure. As of July 26, 2024, the Federal Reserve's benchmark interest rate has reached 5.50%, a high in recent years. According to the latest CPI data, the inflation rate in the United States is 3%, significantly lower than the high point of the same period last year. However, the market expects the Federal Reserve to start cutting interest rates in the coming months to stimulate economic growth.
At the July 31 meeting, the market generally expects the Fed to keep the current interest rate unchanged, but investors are closely watching whether Fed Chairman Powell will hint at a rate cut in September. This expectation is based on signs of slowing US economic growth and the stable performance of the core PCE (personal consumption expenditure) index. The market believes that the probability of the Fed starting to cut interest rates in September is high, and it may cut interest rates again before the end of the year.
Policy challenges for the Bank of Japan:
Unlike the Federal Reserve, the Bank of Japan has long maintained an ultra-low interest rate policy to stimulate economic growth and get rid of deflation. As of March 19, 2024, the Bank of Japan's benchmark interest rate remains at 0.1%. Although the market expects the Bank of Japan to keep interest rates unchanged at its July 30 meeting, the possibility of further rate hikes in the future remains.
Japan's current CPI is 2.8%, close to its target. Despite this, the Bank of Japan still shows a relatively conservative attitude in policy adjustments. The market generally believes that the Bank of Japan needs to find a balance between stabilizing the exchange rate and stimulating the economy. If economic growth and inflationary pressures continue to rise, the Bank of Japan may be forced to adopt a tighter monetary policy.
Carry Trade and Yen Depreciation: Japan’s Government Rescue Measures May Affect the Crypto Industry
The appeal of the carry trade:
As one of the world's major financing currencies, the Japanese yen's low interest rate makes it an ideal choice for carry trades. The basic principle of carry trades is to borrow low-interest Japanese yen and invest in high-interest assets to earn the interest rate difference. Currently, due to the high interest rate policy of the Federal Reserve, the US dollar has become one of the main underlying assets for carry trades.
According to data, the total return rate of carry trades reached 18% in the past year. The widespread use of this trading strategy has led to the continued depreciation of the yen, with the exchange rate against the US dollar approaching its lowest level in 34 years. Although the Bank of Japan has intervened several times to curb the depreciation of the yen, the effect has been limited. The market generally believes that as long as the return rate of carry trades remains high, the pressure for the yen to depreciate will continue.
Japanese authorities' response
In order to cope with the pressure of yen depreciation, Japanese authorities may take more radical measures in the future. Although the market expects that the Bank of Japan will not raise interest rates significantly in the short term, as the global economic situation develops, the Bank of Japan may be forced to adjust its policy stance. If the Bank of Japan takes action to raise interest rates in the coming months, it will have a significant impact on carry trades and global capital markets.
Market participants generally believe that the Bank of Japan needs to find a balance between stabilizing the exchange rate and stimulating the economy. Although raising interest rates may help curb the depreciation of the yen, it will also have a negative impact on economic growth. Therefore, the policy choices of the Bank of Japan will largely depend on future economic data and inflation.
The linkage effect of the global economy: This round of the US dollar cycle may have a more profound impact on the crypto circle
The spillover effects of the Fed’s policies
The Fed's monetary policy not only affects the US economy, but also has a profound impact on the global financial market. Currently, the Fed's high interest rate policy has attracted a large amount of international capital to flow into the United States, pushing the dollar to strengthen. For emerging market countries, a stronger dollar means increased pressure on capital outflows and exchange rate depreciation, which may in turn trigger turmoil in the financial market.
As the Fed's expected interest rate cut approaches, the global market will usher in an important adjustment period. If the Fed starts to cut interest rates in the next few months, it may lead to a weakening of the US dollar and ease the pressure of capital outflows from emerging markets. This will have a positive impact on global economic recovery and financial market stability.
Regional impact of Bank of Japan policy
As the world's third largest economy, Japan's monetary policy also has an important impact on the regional economy. The Bank of Japan's ultra-low interest rate policy has supported economic growth in Asia in the past few years. However, with rising global inflation, the Bank of Japan is under pressure to adjust its policy.
If the Bank of Japan takes interest rate hike measures in the future, it will have a significant impact on the financial markets in the region. First, the strengthening of the yen may lead to a decline in regional competitiveness and affect exports. Second, the interest rate hike may have a suppressive effect on domestic consumption and investment in Japan, thereby affecting economic growth. Therefore, the Bank of Japan's future policy choices will play a key role in the stability and development of the regional economy.
Cryptocurrency market reaction: volatility fundamentally depends on the Fed’s monetary policy
Bitcoin and Ethereum market performance
The cryptocurrency market is also affected by global macroeconomic policies. Since March this year, the Bitcoin and Ethereum markets have experienced wide fluctuations. According to data from Greeks.live, Bitcoin has approached its historical high, while Ethereum has performed relatively poorly. Interest rate decisions have an important impact on the volatility of the cryptocurrency market.
As the market expects the Federal Reserve to cut interest rates soon, investors' risk appetite for the cryptocurrency market has increased. In particular, short-term Bitcoin call options have become more attractive. At the same time, Ethereum's implied volatility is slightly higher than Bitcoin, but its market performance remains sluggish. This market pattern reflects the differences in investors' risk appetite and expected returns for different cryptocurrencies.
Opportunities in the interest rate market
The cryptocurrency interest rate market is also affected by macroeconomic policies. Currently, the interest rate market on trading platforms such as Bitfinex is relatively calm, but there are still some attractive interest rate orders. For investors, choosing the right interest rate order to trade at the right time is still an effective way to realize returns.
As the interest rate decisions of the Federal Reserve and the Bank of Japan approach, the cryptocurrency market may usher in a period of volatility. Investors need to pay close attention to changes in macroeconomic policies and adjust investment strategies in a timely manner to cope with market uncertainties. Especially in the short term, choosing the right IV (implied volatility) for option trading may bring higher returns.
Conclusion: This round of Fed rate cuts will fundamentally affect the rise and fall of the crypto market, and all parties are ready
This week, the focus of global financial markets is on the interest rate decisions of the Bank of Japan and the Federal Reserve. These decisions will not only affect the economic direction of the two countries, but will also have a profound impact on the global capital market and cryptocurrency market.
For investors, understanding and analyzing the background and expectations of these macroeconomic policies will help them formulate more reasonable investment strategies and cope with market uncertainties.
As the global economic situation develops, the central bank's policy choices will become more complex and changeable. Investors need to pay close attention to economic data and policy trends and adjust their investment portfolios in a timely manner to achieve long-term and stable returns.
