The Fed's interest rate cuts and the strengthening of the yen will drive Bitcoin back into a bull run

Recently finished a two-week skiing trip in the Southern Hemisphere. Most of the time was spent on backcountry skiing, which requires attaching climbing skins to the bottom of the skis to ascend, and then removing the skins to enjoy downhill skiing once at the top. A typical ski day consists of 80% uphill skiing and 20% downhill skiing, which consumes a lot of energy.

To maintain my physical stamina, I eat throughout the day. Breakfast consists of hearty "real food," including carbohydrates, meats, and vegetables. During skiing, I eat a Snickers and syrup every 30 minutes, even if I'm not hungry. I also stop to eat the "real food" I've prepared, such as chicken or beef, stir-fried leafy greens, and white rice.

This dietary strategy has sparked a discussion about the relative importance of currency prices and quantities. Currency prices are like candy, providing a quick energy boost; while the currency quantity is like slowly burning "real food." At last Friday's Jackson Hole meeting, Powell announced that the Fed will lower policy interest rates, and the Bank of England and the European Central Bank also stated that they will continue to cut interest rates.

The market reacted positively to this, with risk assets generally rising. However, we have forgotten that this will reduce the interest rate differential with the yen, potentially triggering risks in yen arbitrage trading. Unless the money supply is increased in the form of central bank balance sheet expansion, this party may be ruined.

The US dollar against the Japanese yen immediately fell after Powell's announcement, which was expected. This article will delve into this and look ahead to key moments in the coming months.

I think that the decision-makers at the Fed, the Bank of England, and the European Central Bank realize that they must be willing to ease policies and expand their balance sheets to offset the adverse effects of the yen's appreciation.

From an economic perspective, the Fed should raise interest rates instead of lowering them. Since 2020, the U.S. Consumer Price Index has risen by 22%, and the Fed's balance sheet has increased by over $3 trillion. The U.S. government deficit has reached record levels, partly because the cost of issuing debt has not yet been constrained enough to force politicians to balance the budget.

If the Fed truly wants to maintain confidence in the dollar, it should raise interest rates to curb economic activity. However, the Fed is committed to never allowing the financial markets to stagnate. The United States is a highly financialized economy that requires continuously rising prices of fiat assets to make the public feel wealthy.

I believe that Powell, under the instructions of Yellen and Democratic leaders, is sacrificing himself by choosing to cut rates when he shouldn't. The power of the U.S. Treasury surpasses that of the Fed. Although the Fed had been raising interest rates until March 2023, the Treasury found ways to simultaneously increase the money supply.

The US economy does not crave interest rate cuts, but Powell will provide stimulus. As the monetary authorities are extremely sensitive to any decline in the prices of legal stocks, Powell and Yellen will soon expand the Fed's balance sheet in some form to offset the impact of the yen appreciation.

Powell made adjustments based on a controversial employment report. The Biden administration's Department of Labor released a significant revision of prior employment data a few days ago, indicating that the employment estimates were overstated by about 800,000. This puts Powell in a dilemma, as he cannot lower interest rates due to falling inflation, nor can he lower rates citing a weak labor market.

When politics overrides the economy, I am more confident in my predictions. This is because the politicians in power want to maintain their authority. They will spare no effort, regardless of economic conditions, to fight for re-election. This means that the current Democrats will use all monetary policy tools to keep the stock market rising before the elections in November.

The exchange rates between currencies are primarily influenced by interest rate differentials and expectations regarding future changes in interest rates. When the Fed began tightening monetary policy in March 2022, the yen depreciated significantly. By July of this year, the yen's depreciation had reached a historical high. After the Bank of Japan raised the policy interest rate at the end of July, the yen rebounded strongly. The market is now highly focused on the future trend of the dollar-yen interest rate differential.

If traders close their USD-JPY arbitrage positions when the value of the yen surges, the short-term stimulus from Fed rate cuts may quickly fade away. Taking further rate cut measures to prevent declines in various financial markets will only accelerate the narrowing of the USD-JPY interest rate differential, which in turn will strengthen the yen and lead to more positions being unwound.

If the yen continues to appreciate rapidly, the Fed may halt its quantitative tightening plan and even resume quantitative easing by printing money. Yellen will increase dollar liquidity by selling more government bonds and reducing the fiscal account balance. If the USD-JPY exchange rate quickly falls below 140, they are likely to provide the "real food" needed by the financial markets.

In the final phase of the third quarter, the conditions for fiat liquidity couldn't be better. As cryptocurrency holders, we have the following tailwinds behind us:

1. Central banks around the world are lowering funding costs. The Fed is still cutting interest rates while inflation is above target, and the US economy continues to grow. The Bank of England and the European Central Bank may further cut rates at their upcoming meetings.

2. Yellen promised to inject $301 billion in liquidity into the financial markets before the end of the year.

3. The U.S. Treasury still has about $740 billion available in general accounts to stimulate the market.

4. The Bank of Japan stated that future interest rate hikes will take market conditions into account, meaning that if it believes the market will decline, it will not raise interest rates.

I am a person from the coin circle and do not pay attention to stocks. However, if the Fed lowers interest rates when inflation is above target and economic growth is strong, they are likely to increase money printing significantly, which will greatly increase the money supply. This will lead to inflation, which may be detrimental to certain businesses. But for assets with limited supply like Bitcoin, it will cause their prices to soar.