In his latest essay “Spirited Away,” Arthur Hayes, the previous CEO of BitMEX, dives into the complexities of the worldwide financial markets, with a give attention to the approaching unwinding of the dollar-yen carry trade and its impact on the crypto market.
Hayes begins by discussing the potential actions of the US Vice President Kamala Harris in response to an impending financial crisis, influenced by her have to secure electoral victory. He predicts, “Harris will instruct Yellen to make use of the monetary tools available to her to avert a financial crisis,” suggesting an instantaneous response to stabilize the markets expected “no later than the opening of Asian trading next Monday, August twelfth.”
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The evaluation revolves across the ‘yen carry trade,’ where Japan Inc. borrows yen at low rates to speculate in higher-yielding foreign assets. This trade has been massively profitable as a consequence of the Bank of Japan’s (BOJ) policies that keep yen liabilities low and asset returns high, facilitated by a weak yen. Nonetheless, Hayes points out the vulnerabilities of this strategy: “If the BOJ ceases its bond purchases, the unwinding could lead on to significant yen appreciation and a corresponding decline in global equity markets.”
Hayes outlines the potential dire consequences of a sudden strengthening of the yen, predicting drastic impacts on global stock markets. He quantifies these impacts, stating, “If the dollar-yen reached 100, a 38% move, the Nasdaq would drop to ~12,600 and the Nikkei to ~25,365,” indicating severe repercussions for global financial stability.
In accordance with the previous BitMEX CEO, the total unwind of the dollar-yen carry trade is a matter of when, not if. “The query is when the Fed and Treasury will print money to blunt its effects on Pax Americana,” he adds and describes a scenario where the US equity markets could crash into this upcoming Friday. “Then some type of motion over the weekend is probable,” in response to Hayes.
He further theorizes on a more long-term scenario: “If the yen starts to weaken again, the crisis is over within the immediate term. The unwind will proceed, albeit at a slower pace. I think the markets will throw one other tantrum between September and November because the dollar-yen pair resumes its death march toward 100. There will certainly be a response this time around, because the US presidential election can be weeks or days away.”
How To Trade Crypto In This Environment
Hayes describes the situation as complex as a consequence of two conflicting liquidity forces. “Trading this in a crypto fashion is difficult. Two opposing forces influence my crypto positioning,” he states.
First, there’s the “Liquidity Positive Force”. This force emerges from the US Treasury’s potential actions, which could inject significant dollar liquidity into the market. Hayes notes, “After 1 / 4 of net restrictive policy, the US Treasury will net inject dollar liquidity because it is going to issue Treasury bills and possibly deplete the Treasury General Account.” This influx of liquidity could buoy markets, including cryptocurrencies, by providing more capital for investment.
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Conversely, the strengthening of the yen (“Liquidity Negative Force”), driven by the unwinding of the carry trade, would necessitate a world sell-off of monetary assets as higher yen costs make debt servicing dearer. This force could lead on to a withdrawal of liquidity from markets, exerting downward pressure on asset prices, including cryptocurrencies.
Hayes proposes that the interplay of those forces will dictate the behavior of Bitcoin and other cryptocurrencies. He categorizes potential outcomes into two scenarios:
Convex-Bitcoin Scenario: On this scenario, Bitcoin could rise in value no matter whether the dollar-yen pair strengthens or weakens, indicating that the market expects a bailout if the yen strengthens and that the liquidity provided by the US Treasury is sufficient to counteract the negative impacts.
Correlated-Bitcoin Scenario: Here, Bitcoin’s price movements would align closely with traditional financial markets. A strengthening yen would result in a fall in Bitcoin prices, and a weakening yen would lead to an increase, mirroring the liquidity shifts in traditional finance.
“If the setup is convex-Bitcoin, I’ll aggressively add positions as we’ve got reached the local bottom. If the setup is correlated-Bitcoin, then I’ll sit on the sidelines and wait for the eventual market capitulation. The mega assumption is that the BOJ won’t reverse course, cut deposit rates back to 0%, and resume unlimited JGB purchases. If the BOJ sticks by the plan it laid out at its last meeting, the carry trade unwind will proceed,” Hayes concludes.
At press time, BTC traded at $57,200.
Bitcoin uptrend pauses at major resistance, 1-day chart | Source: BTCUSDT on TradingView.com
Featured image from YouTube, chart from TradingView.com