TL;DR
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$4T left the global markets as investors closed their Yen carry trades, leading to a crash in stocks, commodities, and crypto — but this could be the catalyst for hard rate cuts and liquidity injections, leading to a blow off top for crypto markets in 2024.
Full Story
If you opened your trading apps yesterday morning only to be accosted by a sea of red and want to know what happened — we’ve got you.
It all started with the Japanese ‘carry trade’…here’s what that is:
When a central bank raises its interest rates, its underlying currency typically goes up in value.
(E.g. The US dollar has been gaining strength over the past 18 months as the Federal Reserve continued to raise/hold interest rates).
…on the cooler side of the pillow — if a central bank keeps its rates low, its currency stays cheap.
(E.g. Exactly what the Bank of Japan has been doing, leading to a weaker/cheaper Yen).
And herein lies the opportunity for a ‘carry trade.’
Investors take out loans in Yen (with lower interest rates / repayments) to buy other assets that are gaining value, quicker (e.g. the US dollar, stocks, commodities, etc).
It works beautifully!
…until it doesn’t.
See, the Bank of Japan (BoJ) recently raised rates from 0.1% to 0.25% (making the Yen more valuable in the process), while the US Federal Reserve is expected to start lowering rates (which will make the US dollar less valuable).
Which means those carry trades are about to become less profitable, and require higher interest repayments.
So traders are selling out and taking their profits…only problem is:
There is (or at least, was) about $4 TRILLION dollars locked up in these carry trades.
So $4T of sell pressure just hit global stock, crypto, and commodity markets…
Add that to the pre-existing uncertainty surrounding potential war in the Middle East and the results in the upcoming US federal election…
And you get yesterday’s market crash.
From Sunday till the time of this writing, Bitcoin went from a high of $61k to a low of $49.5k, Ethereum went from a high of $2.9k to a low of $2.1k, and Solana went from a high of $145 to a low of $110.
Say it with us now: “Oooft!”
“…so, we’re all doomed?” — the market rn.
Let’s take a moment to remove our fingers from the panic button, and zoom out a bit.