What impact will this week’s interest rate decisions by the Bank of Japan and the Federal Reserve have on the crypto community?

Author: 0xmonomi

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 major 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 story of the incident: The two major financial powers of the United States and Japan began to adjust financial policies

The course of the Federal Reserve’s monetary policy:

Since 2022, the Federal Reserve has adopted a series of interest rate measures to cope with rising inflationary pressures. As of July 26, 2024, the Federal Reserve'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 United States is 3%, significantly lower than the high point of the same period last year. However, markets expect the Federal Reserve to begin cutting interest rates in the coming months to stimulate economic growth.

At the July 31 meeting, the Fed is widely expected to keep current interest rates unchanged, but investors are paying close attention to whether Fed Chairman Powell will hint at a rate cut plan in September. This expectation is based on signs of slowing U.S. economic growth and a flat performance in the core PCE (Personal Consumption Expenditures) index. The market believes that the probability of the Federal Reserve starting to cut interest rates in September is relatively high, and it may cut interest rates again before the end of the year.

Policy challenges of the Bank of Japan:

Unlike the Federal Reserve, the Bank of Japan has maintained ultra-low interest rate policies for a long time 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 interest rate hikes in the future still exists.

Japan’s current CPI is 2.8%, close to the target it has set. 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 tighter monetary policy.

Carry trade and yen depreciation: The Japanese government’s bailout may affect the crypto industry

The attractiveness of carry trade:

The yen as a One of the world's major funding currencies, its low interest rates make it ideal for carry trades. The basic principle of arbitrage trading is to borrow Japanese yen with low interest rates and invest in assets with high interest rates, thereby earning interest differentials. Currently, due to the Federal Reserve's high interest rate policy, the U.S. dollar has become one of the main underlying assets for carry trades.

According to data, the total return rate of arbitrage trading reached 18% in the past year. The widespread use of this trading strategy has contributed to the continued depreciation of the Japanese yen, which is close to its lowest level in 34 years against the US dollar. 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 returns on carry trades remain high, pressure to depreciate the yen will continue.

Countermeasures of the Japanese authorities

In order to cope with the pressure of the depreciation of the yen, the Japanese authorities may take more radical measures in the future. Although the market does not expect the Bank of Japan to 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 raises 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 yen's decline, it will also have a negative impact on economic growth. Therefore, the Bank of Japan's policy choices will largely depend on future economic data and inflation.

Linked effects of the global economy: This dollar cycle may have a more profound impact on the cryptosphere

Spillover effects of the Federal Reserve’s policy

The Federal Reserve’s monetary policy It not only affects the U.S. economy, but also has a profound impact on global financial markets. Currently, the Federal Reserve's high interest rate policy has attracted a large amount of international capital to flow into the United States, pushing the U.S. dollar to strengthen. For emerging market countries, a stronger U.S. dollar means increased pressure on capital outflows and exchange rate depreciation, which may trigger turmoil in financial markets.

As the Federal Reserve’s expected interest rate cut approaches, global markets will usher in an important period of adjustment. If the Federal Reserve begins to cut interest rates in the next few months, it may cause the dollar to weaken and alleviate the pressure of capital outflows from emerging markets. This will have a positive impact on global economic recovery and financial market stability.

The regional impact of the Bank of Japan’s policies

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 the Asian region over the past few years. However, as global inflation rises, the Bank of Japan is under pressure to adjust 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. Secondly, raising interest rates may have a suppressive effect on Japan's domestic consumption and investment, thereby affecting economic growth. Therefore, the Bank of Japan’s policy choices in the future will play a key role in the stability and development of the regional economy.

Cryptocurrency market reaction: market fluctuations fundamentally depend on the Federal Reserve’s monetary policy

The market performance of Bitcoin and Ethereum

The same goes for the cryptocurrency market 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 is approaching all-time highs, while Ethereum’s performance is relatively sluggish. Interest rate decisions have a significant impact on the volatility of the cryptocurrency market.

In the context of market expectations that the Federal Reserve is about to cut interest rates, investors' risk appetite for the cryptocurrency market has increased. In particular, short-term Bitcoin call options have become more attractive. Meanwhile, Ethereum’s implied volatility is slightly higher than Bitcoin’s, but its market performance remains subdued. 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 has also been 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 for trading at the right time is still an effective way to achieve profits.

As interest rate decisions from the Federal Reserve and Bank of Japan approach, the cryptocurrency market may be heading for 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 uncertainty. Especially in the short term, choosing the right IV (implied volatility) for options trading may lead to higher returns.

Conclusion: This round of interest rate cuts by the Federal Reserve will fundamentally affect the rise and fall of the crypto market, and everyone is ready

This week, the focus of the global financial market is on the Bank of Japan and the Federal Reserve’s interest rate decision. These decisions will not only affect the economic trends 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 formulate more reasonable investment strategies to cope with market uncertainty.

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 investment portfolios in a timely manner to achieve long-term stable returns.