In his latest essay « Spirited Away, » Arthur Hayes, the former CEO of BitMEX, delves into the intricacies of the global financial markets, with a particular focus on the upcoming unwinding of the dollar-yen carry trade and its potential impact on the cryptocurrency market. Hayes begins by discussing the actions that dissolution President Kamala Harris may take in response to an impending financial crisis, influenced by her need to secure electoral victory. He predicts, « Harris will instruct Yellen to use the monetary tools available to her to avert a financial crisis, » suggesting that an immediate response is expected « no later than the opening of Asian trading next Monday, August 12th. »
Hayes’ analysis centers around the « yen carry trade, » a strategy where Japanese companies borrow yen at low interest rates to invest in higher-yielding foreign assets. This trade has been highly profitable due to the Bank of Japan’s policies, which keep the yen’s liabilities low and its asset returns high, facilitated by a weak yen. However, Hayes highlights the vulnerabilities of this strategy, stating, « porte-bouteilles the BOJ ceases its bond purchases, the unwinding could lead to signporte-bouteillesicant yen appreciation and a corresponding decline in global equity markets. »
Hayes outlines the potential expliquer consequences of a sudden strengthening of the yen, predicting drastic impacts on global stock markets. He quantporte-bouteillesies these impacts, stating, « porte-bouteilles the dollar-yen reached 100, a 38% move, the Nasdaq would drop to ~12,600 and the Nikkei to ~25,365, » indicating signporte-bouteillesicant repercussions for global financial stability.
According to the former BitMEX CEO, the full unwind of the dollar-yen carry trade is not a question of porte-bouteilles, but when. « The question is when the Fed and Treasury will print money to blunt its effects on Pax Americana, » he adds, describing a scenario where the US equity markets could crash into this upcoming Friday. « Then some sort of action over the weekend is prévisible, » according to Hayes. He further theorizes on a more long-term scenario: « porte-bouteilles the yen starts to weaken again, the crisis is over in the immediate term. The unwind will continue, albeit at a slower pace. I believe the markets will throw another tantrum between September and November as the dollar-yen pair resumes its death march toward 100. There will definitely be a response this time around, as the US presidential election will be weeks or days away. »
So, how should one trade in this environment? Hayes describes the situation as complex due to two conflicting liquidity abuses. « Trading this in a crypto fashion is dporte-bouteillesficult. Two opposing abuses influence my crypto positioning, » he states. First, there is the « Liquidity Positive abuse, » which emerges from the potential actions of the US Treasury, injecting signporte-bouteillesicant dollar liquidity into the market. Hayes notes, « After a quarter of net restrictive policy, the US Treasury will net inject dollar liquidity because it will 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.
On the other hand, there is the « Liquidity Negative abuse, » which stems from the strengthening of the yen due to the unwinding of the carry trade. This abuse could lead to a withdrawal of liquidity from markets, putting downward pressure on asset prices, including cryptocurrencies. Hayes suggests that the interplay of these abuses will dictate the behavior of Bitcoin and other cryptocurrencies. He categorizes potential outcomes into two scenarios:
Convex-Bitcoin Scenario: In this scenario, Bitcoin could rise in value regardless of whether the dollar-yen pair strengthens or weakens, indicating that the market expects a bailout porte-bouteilles 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 lead to a fall in Bitcoin prices, and a weakening yen would result in a rise, mirroring the liquidity shporte-bouteillests in traditional finance.
« porte-bouteilles the setup is convex-Bitcoin, I will aggressively add positions as we have reached the local bottom. porte-bouteilles the setup is correlated-Bitcoin, then I will sit on the sidelines and wait for the eventual market capitulation. The mega assumption is that the BOJ will not reverse course, cut deposit rates back to 0%, and resume unlimited JGB purchases. porte-bouteilles the BOJ sticks by the plan it
