This week, global financial markets are focused 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 deviates from these expectations could serve as a major market mover.
The policy decisions of these two major central banks will not only impact their respective national economies but also have far-reaching effects on global financial markets, capital flows, and exchange rates.
Background: The Financial Policy Adjustments of the US and Japan
The Federal Reserve's Monetary Policy Journey:
Since 2022, the Federal Reserve has implemented a series of interest rate hikes to combat persistent inflationary pressures. As of July 26, 2024, the Fed's benchmark interest rate has reached 5.50%, a high point in recent years. According to the latest CPI data, the inflation rate in the US is 3%, significantly lower than the peak of the previous year. However, market expectations suggest that the Fed may begin cutting rates in the coming months to stimulate economic growth.
At the meeting on July 31, the market widely expects the Fed to keep the current interest rate unchanged, but investors are closely watching whether Fed Chairman Jerome Powell will hint at a rate cut plan for September. This expectation is based on signs of a slowing US economy and stable performance of the core PCE (Personal Consumption Expenditures) index. The market believes there is a high probability that the Fed will start cutting rates in September and may cut rates again before the end of the year.
The Bank of Japan's Policy Challenges:
In contrast to the Fed, the Bank of Japan has long maintained an ultra-low interest rate policy to stimulate economic growth and overcome deflation. As of March 19, 2024, the Bank of Japan’s benchmark rate remains at 0.1%. Although the market expects the BoJ to keep rates unchanged at the meeting on July 30, the possibility of further rate hikes in the future still exists.
Japan’s Current CPI and Monetary Policy
Japan’s current Consumer Price Index (CPI) stands at 2.8%, nearing its target. Despite this, the Bank of Japan remains relatively conservative in its policy adjustments. The market generally believes that the Bank of Japan needs to balance stabilizing the exchange rate with stimulating the economy. If economic growth and inflationary pressures continue to rise, the Bank of Japan may be compelled to adopt a more restrictive monetary policy.
Carry Trades and Yen Depreciation: Potential Impacts on the Crypto Industry
Attractiveness of Carry Trades:
The yen, as one of the world’s major funding currencies, is an ideal choice for carry trades due to its low interest rates. The basic principle of a carry trade is to borrow funds in a currency with low interest rates, like the yen, and invest in assets with higher interest rates, thereby earning the interest rate differential. Currently, due to the Federal Reserve’s high interest rate policy, the US dollar has become one of the primary assets for carry trades.
Here’s the translation of the text into English:
---
Arbitrage Trading and Its Impact on the Japanese Yen
According to recent data, the total return rate for arbitrage trading has reached 18% over the past year. The widespread use of this trading strategy has led to a continued depreciation of the Japanese yen, with the exchange rate against the US dollar nearing a 34-year low. Despite repeated interventions by the Bank of Japan to curb the yen’s decline, the effectiveness has been limited. The market generally believes that as long as the return rate for arbitrage trading remains high, pressure on the yen to depreciate will persist.
Japanese Authorities' Countermeasures
In response to the pressure on the yen, Japanese authorities may adopt more aggressive measures in the future. Although the market does not expect the Bank of Japan to significantly raise interest rates in the short term, developments in the global economic landscape may force the Bank to adjust its policy stance. Should the Bank of Japan decide to raise rates in the coming months, it would have a significant impact on arbitrage trading and global capital markets.
Market participants broadly agree that the Bank of Japan needs to find a balance between stabilizing the exchange rate and stimulating the economy. While raising interest rates may help mitigate the yen’s depreciation, it could also negatively impact economic growth. Thus, the Bank of Japan’s policy choices will largely depend on future economic data and inflation conditions.
Global Economic Interconnections: Potential Deeper Impacts on the Crypto Space
Fed’s Policy Spillover Effects
The Federal Reserve’s monetary policy not only affects the US economy but also has far-reaching effects on global financial markets. Currently, the Fed’s high interest rate policy is attracting significant international capital inflows into the US, strengthening the dollar. For emerging market countries, a stronger dollar means increased capital outflows and exchange rate depreciation pressure, potentially leading to financial market instability.
As the expected time for Fed rate cuts approaches, global markets will face a significant adjustment period. If the Fed begins cutting rates in the coming months, it could lead to a weaker dollar, alleviating capital outflow pressures in emerging markets. This would positively impact global economic recovery and financial market stability.
Regional Impact of Bank of Japan’s Policies
As the world’s third-largest economy, Japan’s monetary policy also has a significant impact on the regional economy. The Bank of Japan’s ultra-low interest rate policy has supported economic growth in the Asian region over the past few years. However, with rising global inflation, the Bank of Japan faces pressure to adjust its policies.
If the Bank of Japan decides to raise interest rates in the future, it will have a major impact on the regional financial markets. Firstly, a stronger yen could reduce regional competitiveness and affect exports. Secondly, higher interest rates could suppress domestic consumption and investment in Japan, impacting economic growth. Therefore, the Bank of Japan’s future policy choices will play a crucial role in regional economic stability and development.
Cryptocurrency Market Reactions: Market Fluctuations Fundamentally Driven by Fed Policy
Bitcoin and Ethereum Market Performance
The cryptocurrency market is also influenced by global macroeconomic policies. Since March this year, the Bitcoin and Ethereum markets have experienced significant fluctuations. According to Greeks.live, Bitcoin is nearing its historical highs, while Ethereum has been relatively subdued. Interest rate decisions have a substantial impact on cryptocurrency market volatility.
In the context of anticipated Fed rate cuts, investors’ risk appetite for the cryptocurrency market has increased. Short-term bullish Bitcoin options have become particularly attractive. Meanwhile, Ethereum’s implied volatility is slightly higher than Bitcoin’s, but its market performance remains lackluster. This market pattern reflects differing investor risk appetites and expected returns for various cryptocurrencies.
Opportunities in the Interest Rate Market
The cryptocurrency interest rate market is also influenced by macroeconomic policies. Currently, platforms like Bitfinex have relatively calm interest rate markets, but there are still some attractive rate orders available. For investors, timing the selection of suitable interest rate orders remains an effective way to achieve returns.
As the Federal Reserve and the Bank of Japan approach their interest rate decisions, the cryptocurrency market may experience a period of volatility. Investors should closely monitor changes in macroeconomic policies and adjust their investment strategies promptly to navigate market uncertainties. In particular, choosing the right implied volatility (IV) for options trading in the short term could yield higher returns.
Conclusion: The upcoming Fed rate cut is set to fundamentally impact cryptocurrency market fluctuations, and various market participants are already preparing.
This week, the global financial markets are focused on the interest rate decisions of the Bank of Japan and the Federal Reserve. These decisions will not only influence the economic trajectories of the two countries but will also have profound implications for the global capital markets and the cryptocurrency sector.
For investors, understanding and analyzing the background and expectations of these macroeconomic policies will aid in formulating more rational investment strategies to address market uncertainties.
As global economic conditions evolve, central bank policy choices will become increasingly complex and variable. Investors need to stay attentive to economic data and policy developments, adjusting their portfolios accordingly to achieve long-term, stable returns.
