Arthur Hayes: Multiple central banks have started to cut interest rates. How will the crypto market develop?

Author: Arthur Hayes, founder of BitMEX; Translated by Deng Tong, Golden Finance

The USD/JPY exchange rate is the most important macroeconomic indicator. In my last article, Arthur Hayes: Why a Weak Yen Could Push BTC to $1 Million, I wrote that something had to be done to make the yen stronger. The solution I proposed was that the Federal Reserve (Fed) could exchange an unlimited amount of freshly printed dollars with the Bank of Japan (BOJ) for yen. This would allow the Bank of Japan to provide unlimited dollar firepower to the Ministry of Finance (MOF), which could then use those dollars to buy yen on the global foreign exchange market.

While I still believe in the validity of the solution, it appears that the central bank crooks who run the Group of Fools (i.e. the G7) have chosen to convince the market that the interest rate differential between the Yen and the USD, EUR, GBP and CAD will narrow over time. If the market believes this future state, it will buy the Yen and sell all other currencies. Mission accomplished!

In order for this magic to work, the G7 central banks with “higher” policy rates (the Federal Reserve, the European Central Bank “ECB”, the Bank of Canada “BOC” and the Bank of England “BOE”) must lower their rates.

The key thing to note is that the Bank of Japan’s policy rate (green) is 0.1%, while all other countries have 4-5%. The interest rate differential between the domestic and foreign currencies fundamentally drives exchange rates. When inflation became so severe that the elites could no longer ignore the pain and suffering of the common people, the central banks of the G7 (except the Bank of Japan) all raised interest rates sharply.

The Bank of Japan cannot raise interest rates because it owns more than 50% of the Japanese Government Bond (JGB) market. The rate cuts cause JGB prices to surge, making the Bank of Japan look solvent. However, if the Bank of Japan allows interest rates to rise and its JGB holdings fall, the highly leveraged central bank will suffer catastrophic losses. I did some scary calculations for readers in Arthur Hayes: Why a Weak Yen Could Push BTC to $1 Million.

That is why if Bad Gurl Yellen, the head of the G7, decides to reduce the spread, the only option is for the central banks with “high” policy rates to cut rates. According to orthodox central bank thinking, if inflation is below target, rate cuts are a good thing. What is the target?

For some reason, I don't know why, every G7 central bank has an inflation target of 2%, regardless of differences in culture, growth, debt, demographics, etc. Has the current inflation rate broken through 2%?

Each colored line represents a different G7 central bank inflation target. The horizontal line is 2%. No G7 government has published manipulative and dishonest inflation statistics below target. From my technical analysis, it looks like G7 inflation is forming a local bottom in the 2-3% range before exploding higher.

Given that chart, orthodox central bankers would not cut rates to current levels. Yet this week, the Bank of Canada and the European Central Bank cut rates even as inflation was above target. This is odd. Is there financial turmoil that requires cheap money? No.

The Bank of Canada cut its policy rate (yellow) as inflation (white) rose above its target (red).

The ECB cuts its policy rate (yellow) while inflation (white) is above target (red).

The problem is the weak yen. I believe bad girl Yellen has stopped the kabuki show of rate hikes. It is time to start working on preserving the US-led global financial system. If the yen does not appreciate, US Treasuries will be sold off, and if that happens, it will be a game, set and match for the US-led peace.

Next step

The G7 will meet in a week. The communique released after the meeting will be of great interest to the market. Will they announce some kind of coordinated currency or bond market manipulation to strengthen the yen? Or will they remain silent but agree that everyone except the Bank of Japan should start cutting rates? Stay tuned!

The big question is whether the Fed will start cutting rates as the U.S. presidential election approaches in November. Typically, the Fed does not change course close to an election.

If the Fed cuts rates at their upcoming June meeting and their preferred inflation measure is above target, USD/JPY will fall sharply, which means a stronger yen. I don't think the Fed is ready to cut rates as "Slow Joe Biden" is being blasted in the polls for rising prices. Understandably, the American civilian population cares more about whether the vegetables they eat are more expensive than the cognitive abilities of the vegetables they are running for reelection. To be fair, Trump is also a vegetable as he likes to watch Shark Week while eating McDonald's fries. I still think a rate cut would be political suicide. My base case is for the Fed to keep rates unchanged.

On June 13, while these amateurs sit down to their taxpayer-paid feast, the Fed and the Bank of Japan will hold their June policy meetings. As I have said before, I do not expect any changes in monetary policy from the Fed or the Bank of Japan. The Bank of England will meet shortly after the G7, and while the consensus is that they will keep their policy rates unchanged, I think a move to the downside could be a surprise given the rate cuts by the BoE and ECB. The BoE has nothing to lose. The Conservatives will lose badly at the next election, so there is no reason to defy the orders of their former colonial rulers in order to control inflation.

Many central banks begin to cut interest rates

This week, the Bank of Canada and the European Central Bank kicked off the June central bankers’ season with rate cuts, which will pull cryptocurrencies out of the northern hemisphere summer doldrums. This was not the base case I expected. I thought the party would start in August, right around the time the Fed holds its Jackson Hole Symposium. This is typically where sudden policy changes are announced in the fall.

The trend is clear. The fringe central banks are beginning an easing cycle.

We know how to play this game. It’s the same game we’ve been playing since 2009 when our savior Satoshi gave us the weapons to defeat the TradFi demon.

Go long Bitcoin, then shitcoins.

The macro landscape has changed compared to my baseline, and therefore, my strategy will change as well.

For my excess Ethena USD (USDe), which is earning some juicy APY, it’s time to deploy it again into staunch shitcoins. Of course, I’ll tell readers what they are after I buy them. But it’s fair to say that the crypto bull market is reawakening and is about to prick the skin of profligate central bankers.