Author: Tehsin Amlani, Messari Research Analyst; Compiler: 0xjs@黄金财经
A global sell-off has swept the world, with US indices down 3% and cryptocurrency market capitalization down 11% in the past 48 hours.
One factor that has contributed to the global market contraction is the Bank of Japan (BoJ) rate hike and its impact on a popular investment strategy, the carry trade. The carry trade is when investors borrow a low-interest currency (such as the yen) and then reinvest the borrowed currency in a high-interest currency (such as the dollar).
For many years, investors have borrowed yen at low interest rates (such as about 0.4%) and used the borrowed yen as leverage. They exchanged yen for dollars (or other strong, high-yielding currencies) and received almost free margin. This arbitrage is possible because there is a large gap between the low borrowing rate of the yen and the high interest rate of the dollar.
However, since the Bank of Japan raised its interest rate from 0-0.1% to ≈0.25% last week, effectively ending its negative rate policy, the yen carry trade has become significantly less attractive, causing many investors to close their positions.
As investors repay their borrowed yen, the yen has strengthened against the dollar, with the USD/JPY pair just reaching its lowest level since 2023.
As the yen strengthens, more yen carry trades will be subject to margin calls and the underlying assets will be sold off, hammering global markets.
The era of free yen loans is coming to an end.
What does this mean for the cryptocurrency market?Cryptocurrencies remain riskier than U.S. stocks, so declines in traditional markets typically lead to larger declines in the cryptocurrency market.
Given the recent high unemployment, stubborn inflation, geopolitical uncertainty, and the subsequent impact of the unwinding of the yen carry trade, we may experience upcoming turbulence.