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

Recently, there have been new changes in the global economic situation. As some countries' central banks begin to lower interest rates, the Crypto Assets market is recovering from the summer slump, signaling that a new bull market may be on the horizon.

The USD-JPY exchange rate is an important indicator for observing the macro economy. In response to the weakening yen, some experts have suggested that the Federal Reserve could exchange newly printed dollars for yen with the Bank of Japan in unlimited amounts. However, currently, the central banks of the G7 (G7) seem to have chosen a different strategy - supporting the yen by narrowing the interest rate differential.

In order to achieve this goal, the Federal Reserve, the European Central Bank, the Bank of Canada, and the Bank of England need to lower their policy interest rates. Notably, the policy interest rate of the Bank of Japan is only 0.1%, while the rates in other countries are around 4-5%. The interest rate differential is a key factor influencing exchange rates.

From March 2020 to early 2022, central banks around the world generally maintained low interest rate policies. However, as inflation problems became increasingly severe, all G7 central banks, except for the Bank of Japan, began to actively raise interest rates. The reason the Bank of Japan finds it difficult to raise interest rates is that it holds more than 50% of Japanese government bonds ( JGB ). If interest rates are allowed to rise, the decline in JGB prices would result in significant losses for the Bank of Japan.

Therefore, if G7 policymakers want to narrow the interest rate spread, the only option is for other central banks with higher policy rates to cut rates. Traditional theory holds that it is reasonable to lower rates when inflation is below the target. However, the current inflation rates in G7 countries are generally above the 2% target.

Nevertheless, this week the Bank of Canada and the European Central Bank chose to cut interest rates despite inflation being above target. This move is quite unusual, as there is no apparent financial turmoil that necessitates a more accommodative monetary policy.

The reasons behind this policy shift may be related to the weakness of the yen. If the yen cannot be strengthened, China may release a depreciated yuan to match Japan's cheap yen, which will pose a threat to the U.S.-dominated global financial system.

Next, the market will closely monitor the upcoming G7 meeting. The post-meeting communiqué may reveal whether there will be coordinated action to support the yen, or if there is a consensus among other countries, aside from Japan, to begin lowering interest rates.

The direction of the Federal Reserve's policies is also an important issue. Typically, the Federal Reserve does not change its policies on the eve of an election. However, given the current special circumstances, we need to maintain flexible thinking. If the Federal Reserve unexpectedly lowers interest rates at the June meeting, the USD/JPY exchange rate may fall significantly.

However, given that inflation issues have negatively impacted Biden's approval ratings, the Federal Reserve is unlikely to easily cut interest rates. Therefore, my basic expectation is that the Federal Reserve will maintain its current policy. The policy of the Bank of England is also worth noting; although the market generally expects its policy rate to remain unchanged, considering the rate cuts by the Bank of Canada and the European Central Bank, the possibility of an unexpected reduction cannot be ruled out.

For Crypto Assets investors, these macroeconomic changes present opportunities. Since 2009, Crypto Assets like Bitcoin have been a powerful tool to counter the traditional financial system. In the current environment, going long on Bitcoin and other high-quality altcoins may be a wise move.

For projects considering issuing tokens, now may be a good time. With the resurgence of the crypto bull market, interest in new projects may increase.

Overall, the initiation of the global interest rate cut cycle has brought new vitality to the Crypto Assets market. Investors should closely monitor changes in the macroeconomic situation and formulate corresponding investment strategies based on their own circumstances.