The global interest rate cut cycle begins, and the Crypto Assets market welcomes new opportunities

In the current macroeconomic situation, investment strategies for Crypto Assets are facing a significant turning point. As some central banks begin to cut interest rates, the Crypto Assets market is expected to recover from the summer slump, indicating that a new bull market may be on the horizon. Since 2009, Bitcoin and other Crypto Assets have been powerful tools challenging the traditional financial system. In the context of the current changes in the macro environment, actively positioning in Bitcoin and other Crypto Assets may be a wise move, and the token issuance of new projects may also welcome good opportunities, as the market is likely to experience a strong rebound.

The USD-JPY exchange rate is an important indicator for observing macroeconomic trends. To strengthen the yen, one possible solution is for the Federal Reserve to exchange newly printed USD with the Bank of Japan for an unlimited amount of yen. This would enable the Bank of Japan to provide ample USD funding to the Japanese Ministry of Finance for purchasing yen in the global foreign exchange market.

Although this plan may be effective, it currently seems that major central banks prefer to make the market believe that the interest rate differentials between the yen and the dollar, euro, pound, and Canadian dollar will gradually narrow. If the market agrees with this expectation, it will buy yen and sell other currencies, thereby strengthening the yen.

In order to achieve this goal, major central banks must lower their relatively high policy interest rates. It is worth noting that the Bank of Japan's policy interest rate is only 0.1%, while the rates of other countries are around 4-5%. The interest rate differential between currencies is a fundamental factor affecting exchange rates.

From March 2020 to early 2022, central banks around the world basically adopted the same policies. However, when inflation became so severe that the elites could no longer ignore the suffering of ordinary people, major central banks, except for the Bank of Japan, began to actively raise interest rates.

The Bank of Japan finds it difficult to raise interest rates because it holds over 50% of Japanese government bonds. When interest rates fall, bond prices rise, making the Bank of Japan's balance sheet look healthier. However, if interest rates are allowed to rise, bond prices will fall, and this highly leveraged central bank will incur substantial losses.

Therefore, to narrow the interest rate spread, the only option is for those central banks with higher policy rates to lower their rates. Traditional central bank theory suggests that rate cuts are justified when inflation is below target. However, currently, the inflation rates of major central banks are all above the target level of 2%.

Nevertheless, the Bank of Canada and the European Central Bank still lowered interest rates this week despite inflation being above target. This approach is quite unusual, as there is currently no evident financial turmoil that requires a looser monetary policy.

The reasons behind these actions may be related to the weakness of the yen. It may now be time to maintain a dollar-dominated global financial system. If the yen cannot be strengthened, China may release a depreciated yuan to match Japan's low-priced yen. This could lead to the selling off of U.S. Treasury bonds, threatening the global financial dominance of the United States.

The G7 is set to hold a meeting, and the subsequent communiqué will be closely watched by the market. Will they announce coordinated actions to strengthen the yen? Or will they tacitly allow other central banks, aside from the Bank of Japan, to start cutting interest rates? The answers to these questions will have a significant impact on the market.

Whether the Federal Reserve will start cutting interest rates as the U.S. presidential election approaches is an important question. Typically, the Federal Reserve does not change its policy on the eve of an election. However, given the current unique political environment, we need to keep an open mind.

If the Federal Reserve cuts interest rates in the upcoming meeting while their preferred inflation indicators remain above target, the USD/JPY exchange rate may fall significantly, indicating a strengthening of the yen. However, given the current political and economic situation, the likelihood of the Federal Reserve cutting rates seems low. My baseline expectation is that the Federal Reserve will keep existing policies unchanged.

This week's interest rate cuts by the Bank of Canada and the European Central Bank have opened the curtain on the central bank policy adjustments in June, which may drive the Crypto Assets market out of the summer slump. Marginal central banks have already begun their easing cycle, and this trend is very evident.

In this macro environment, investment strategies need to be adjusted accordingly. Going long on Bitcoin and other Crypto Assets might be a wise choice. For those considering issuing tokens, now may be a good time.

For investors holding high-yield synthetic US dollar stablecoins, it may be time to reallocate some funds into promising Crypto Assets. The Crypto bull market seems to be awakening and may soon break through the policy restrictions of central banks.