Global attention! How will this week's interest rate decisions by the Bank of Japan (BOJ) and the Federal Reserve (Fed) impact the crypto space?

This week, the 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 exceeds expectations could become a market bombshell.

The policy decisions of these two central banks will not only affect their respective economies but also have far-reaching impacts on global financial markets, capital flows, and exchange rates.

Background: The Financial Policies of the Two Major Economies, the U.S. and Japan, Begin to Adjust

The Monetary Policy Journey of the Federal Reserve:

Since 2022, the Federal Reserve has implemented a series of interest rate hikes to address the 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 U.S. is 3%, significantly lower than the peak of the previous year. However, the market expects the Fed to begin cutting rates in the coming months to stimulate economic growth.
At the meeting on July 31, the market widely anticipates that the Fed will maintain the current interest rate, but investors are closely watching whether Fed Chairman Powell will hint at a rate cut plan for September. This expectation is based on signs of slowing U.S. economic growth and stable performance of the core PCE (Personal Consumption Expenditures) index. The market believes that the probability of the Fed starting to cut rates in September is high and may do so again before the end of the year.

The Policy Challenges of 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 escape deflation. As of March 19, 2024, the BOJ's benchmark interest 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 is 2.8%, close to its target. Nevertheless, the BOJ still shows a relatively conservative attitude towards policy adjustments. The market generally believes that the BOJ needs to find a balance between stabilizing the exchange rate and stimulating the economy. If economic growth and inflationary pressures continue to rise, the BOJ may be forced to adopt a more contractionary monetary policy.

Carry Trade and Yen Depreciation: The Japanese Government's Market Rescue Measures May Impact the Crypto Industry

The Appeal of Carry Trade:

The yen, as one of the major financing currencies globally, has low interest rates that make it an ideal choice for carry trades. The basic principle of carry trading is to borrow low-interest yen and invest in high-interest assets to earn the interest differential. Currently, due to the Fed's high interest rate policy, the dollar has become one of the main target assets for carry trades.

According to data, the total return rate of carry trades has reached 18% over the past year. The widespread application of this trading strategy has led to the continued depreciation of the yen, with the exchange rate against the dollar nearing a 34-year low. Although the BOJ has intervened multiple times to curb yen depreciation, the effects have been limited. The market generally believes that as long as the return rate of carry trades remains high, the pressure for yen depreciation will persist.

Countermeasures by Japanese Authorities

To address the pressure of yen depreciation, Japanese authorities may take more aggressive measures in the future. Although the market expects the BOJ will not significantly raise interest rates in the short term, as global economic conditions evolve, the BOJ may be forced to adjust its policy stance. If the BOJ takes action to raise rates in the coming months, it will have a significant impact on carry trades and global capital markets.
Market participants generally believe that the BOJ needs to find a balance between stabilizing the exchange rate and stimulating the economy. While raising interest rates may help curb yen depreciation, it could also negatively impact economic growth. Therefore, the BOJ's policy choices will largely depend on future economic data and inflation conditions.

The Interconnected Effects of the Global Economy: This Round of Dollar Cycle May Have Deeper Impacts on the Crypto Space

The Spillover Effects of Fed Policy

The Federal Reserve's monetary policy not only affects the U.S. economy but also has profound impacts on global financial markets. Currently, the Fed's high interest rate policy has attracted a large inflow of international capital into the U.S., strengthening the dollar. For emerging market countries, a stronger dollar means increased capital outflows and pressure on exchange rate depreciation, which may lead to turmoil in financial markets.
As the anticipated rate cut by the Fed approaches, global markets will enter a significant adjustment period. If the Fed begins to cut rates in the coming months, it may lead to a weakening dollar, alleviating 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 BOJ Policy

As the world's third-largest economy, Japan's monetary policy also has significant effects on the regional economy. The BOJ'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 BOJ faces pressure to adjust its policy.
If the BOJ takes measures to raise interest rates in the future, it will have a significant impact on the financial markets within the region. First, a stronger yen may lead to a decline in regional competitiveness, affecting exports. Second, raising interest rates may suppress domestic consumption and investment in Japan, thereby impacting economic growth. Therefore, the BOJ's future policy choices will play a crucial role in the stability and development of the regional economy.

The Response of the Cryptocurrency Market: Market Volatility Fundamentally Depends on the Fed's Monetary Policy

The Market Performance of Bitcoin and Ethereum

The cryptocurrency market is also influenced by global macroeconomic policies. Since March of this year, the Bitcoin and Ethereum markets have experienced wide fluctuations. According to data from Greeks.live, Bitcoin is nearing its historical high, while Ethereum's performance remains relatively sluggish. Interest rate decisions have a significant impact on the volatility of the cryptocurrency market.
In the context of market expectations for an imminent rate cut by the Fed, investors' risk appetite for the cryptocurrency market has increased. In particular, short-term Bitcoin call options have become more attractive. Meanwhile, the implied volatility of Ethereum is slightly higher than that of Bitcoin, but its market performance remains lackluster. This market pattern reflects the differences in investors' risk preferences 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 like Bitfinex is relatively calm, but there are still some attractive interest rate orders. For investors, timing the selection of suitable interest rate orders for trading remains an effective way to achieve returns.

As the interest rate decisions of the Fed and the BOJ approach, the cryptocurrency market may enter a period of volatility. Investors need to closely monitor changes in macroeconomic policies and adjust their investment strategies in a timely manner to cope with market uncertainties. Particularly in the short term, selecting suitable IV (implied volatility) for options trading may yield higher returns.

Conclusion: This Round of Fed Rate Cuts Will Fundamentally Affect Cryptocurrency Market Trends, and Various Players Are Prepared

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 affect the economic direction of the two countries but also have profound impacts on global capital markets and the cryptocurrency market.
For investors, understanding and analyzing the background and expectations of these macroeconomic policies will help in formulating more reasonable investment strategies to cope with market uncertainties.
As global economic conditions evolve, the policy choices of central banks will become more complex and variable. Investors need to closely monitor economic data and policy trends, adjusting their portfolios in a timely manner to achieve long-term stable returns.