We are in the eye of the storm, volatility can return at any time.
Things that could have a large effect on crypto price in the coming week,
Any increased conflict in the middle east
Unemployment data on Thursday.
The S&P500/Nasdaq and the Nikkei price.
The FED or Bank of Japan (BOJ) making emergency policy decisions.
America
This is an extremely quiet week for US economic data, all focus will be on the unemployment data on Thursday, if unemployment reads much higher or much lower then the market will react.
This worldwide sell off in the markets is largely due to bad US economic data, especially the labour market, this weeks reading will be key to show any further signs of weakness, the whole market will be watching this reading.
The only thing that would make the Fed consider an emergency rate cut is if the unemployment reading comes out much higher and leads to further market sell off.
All other US economic concerns are still valid, this week the only major reading for the markets is unemployment(August 8, 12:30pm )
Monitor the S&P500 and Nasdaq.
Japan
Firstly it is important to know that the BOJ and the Japanese government feed off each other but both cant win, Policy decisions that are good for one are bad for the other.
Last week Japan made a surprise interest rate hike to try save the Yen.
Japan has intervened a few times over the last years to stop the Yens freefall, it does this by selling hundreds of Billions worth of US treasuries to buy back their currency to intervene, this only had a short term effect and was basically like burning the money.
The bank of Japan did this to create fear in the market, to try stop people shorting the Yen as the fear of an intervention by the BOJ was always possible.
This had little effect and the market continued to short the Yen and the BOJ threw away hundreds of Billions for no lasting effect.
Last week the BOJ increased interest rates to try save the Yen.
The bank of Japan has held 0% interest rates for nearly 20 years, even negative interest rates.
This has led to trillions of dollars worth of carry trading worldwide.
Carry trading is basically borrowing money with the intention to reinvest it in something else and gain profit (positive carry)
Huge funds and even central banks have been doing this for decades, borrowing money in Japan at 0% and investing around the globe.
The increase in Japans interest rate to 0.25% and the fear of future interest rate hikes have effected this global carry trade.
It is important to note that while many large holders have simply borrowed in Japan at 0% and then invested in US treasuries or other currencies/bonds for a 4-5% return(4-5% positive carry) many other traders use the borrowed funds to open leverage positions.
This is where the danger comes in, if this borrowed money is spread accross the market and leveraged or used as collateral against other open positions then the effect can be far greater.
Many of these leveraged positions are in the stock market (US and Japan) and even in Crypto investments.
Many of these positions are now at risk (negative carry) and the market is selling off due to this.
The interest rate hike created fear in the carry trade market but fears of more hikes in the coming months are the main concern for holders with large position, especially if they are leveraged.
Many large Japanese banks have leveraged positions in higher risk investments!
I have posted before (See post July 7th) about this high risk investment in American CLOs (corporate debt).
This carry trade fallout and US economic worries could have a huge impact on those higher risk/reward trades, if the CLOs start to default then the fallout could be massive for large banks in Japan, it would have a knock on effect for the whole economy.
The Japanese banks are already showing huge warning signs👇
For now we need to monitor the Nikkei and see how it performs in the coming days, in the last Asia session it recovered but since has lost all those gains during the London/NY Sessions.
The largest investor in the Nikkei is the Japanese government.
For the Japanese people the Nikkei is the lifeblood of the economy as many Nikkei related stocks are what make up a large part of their retirement/pension funds or other long term investments.
If the Nikkei declines further then the BOJ might need to once again reduce rates or insure no more hikes are planned in the coming months.
This would once again lead to the YENs value collapsing and for the global carry trade to resume.
It is to much to explain but there is no win-win for the Government of Japan and the Bank of Japan, they have survived and stagnated for 20 years but the effect of higher interest rates globally, most importantly in America has taken its toll.
The Japanese economy is a mess, any decision that helps one part has a negative effect on another part, it is basically the Government/stock market or the BOJ/Yen that will win, they both cant win.
Most important for the next couple days,
Japan,
Tomorrow(Aug 7th,11:50pm UTC+0) the BOJ will give a statement, traders will look to this for information about the current interest rate effect and also the possibility of future rake hikes.
America,
This is an extremely quiet week for high impact US data, on Thursday (Aug 8th, 12:30pm UTC+0) we have unemployment claims.
The unemployment claims could be the catalyst for the next move in the market.
The expected number is 241k, if this number comes out much higher or lower the market will react.
If it comes out far above 241k it will lead to another large sell-off as it will fuel recession worries even more.
If it comes out far below 241k it will be bullish as it will be a sign that previous unemployment numbers might have been elevated due to seasonal jobs or some blame hurricane beryl.
For now, like in many previous weeks, Unemployment will be the key focus and the market mover.
From now until then monitor the Nikkei, that will be the first warning sign of further market collapse, also monitor the SP500 and Nasdaq.
The market is currently taking a breather but any further tensions in the middle east, a bad unemployment reading or further falls in the stock markets(Japan and US) could once again lead to huge pressure and volatility.
What crypto needs now is a good (Low) unemployment number on Thursday, also for no further developments in the middle east.
I have purchased more spot BTC and ETH, i think BTC at current prices is a gift if you are willing to be patient and have the available funds to do so, if it falls more i will buy more, that is my only plan in crypto for now.
For people who trade forex,
If the Nikkei crashes further and the BOJ need to make an emergency decision then short the Yen, if this happens then the USD/YEN will likely go back to 160-170 in the coming months.
Trade Safely.
Peace.