Bitcoin’s Death Cross: Analyzing the Impact of Japanese Monetary Policy on Cryptocurrency Markets

Bitcoin’s Death Cross: A Misleading Indicator?

As Bitcoin (BTC) approaches what is known as a death cross—a bearish technical signal indicating potential price declines—there are indications that this pattern may once again defy expectations and signal a resurgence in bullish momentum, similar to the scenario witnessed in September 2023. This shift in sentiment is largely attributed to recent comments from the influential governor of the Bank of Japan (BOJ), Shinichi Uchida.

On Wednesday, Uchida stated that the central bank would refrain from increasing borrowing costs during periods of market instability, a decision that is likely to diminish the likelihood of a continued unwinding of “yen carry trades.” These trades have historically contributed to risk aversion in various assets, including cryptocurrencies such as Bitcoin.

Uchida emphasized the need for continued monetary easing, saying, “As we’re seeing sharp volatility in domestic and overseas financial markets, it’s necessary to maintain current levels of monetary easing for the time being.” This announcement has contributed to an environment of reduced downside risk for Bitcoin, even as the ominous death cross looms on the horizon.

In the wake of Uchida’s remarks, Bitcoin demonstrated resilience, briefly surging past the $57,300 mark. This uptick coincided with the Japanese yen (JPY) depreciating to 148 per U.S. dollar (USD), down from 145 per USD. Additionally, Japan’s equity index, the Nikkei, experienced a notable rise of 4%, signaling a potential reset in risk appetite, as futures linked to the S&P 500 climbed 0.8%.

According to a pseudonymous market observer known as Global Macro, “The BOJ struck the ‘Yen put,’ and the Nikkei will be driving the Nasdaq and S&P to their pre-selloff levels.” This sentiment underscores the interconnectedness of global financial markets and the influence of Japanese monetary policy on broader risk assets.

The yen carry trade—an investment strategy that involves borrowing in low-yielding yen to invest in higher-yielding currencies and risk assets—has gained traction in recent years. This popularity can be attributed to the BOJ’s maintenance of near-zero interest rates, while other central banks, including the Federal Reserve, have rapidly raised borrowing costs to combat inflation.

However, last Wednesday marked a pivotal shift, as the Japanese central bank signaled a departure from its long-standing ultra-easy monetary policy by raising interest rates for the first time in 17 years. This hawkish maneuver triggered a swift unwinding of carry trades, resulting in widespread risk aversion that saw Bitcoin plummet from $66,000 to $50,000 within just five days.

Investment strategist Andy Constan, CEO of Damped Spring Advisors, elaborated on this phenomenon, stating, “By July 16th, the equity markets and many other risky asset markets peaked. For whatever reason, these asset markets began to sell off. As the sell-off continued, recent entrants into the YCT [yen carry trade] saw their assets falling, and to be clear, that is almost always the driver of unwinds. But worse, the yen began rallying slowly. That began the unwind.”

Constan further explained the mechanics of this unwinding process, noting, “The unwind of the trade results in inelastic price moving flow to buy yen and sell risky assets. The sale of the risky asset also impacts the much bigger set of levered investors who don’t have any yen exposure at all, and they get margin called as well.” This complex interplay of market dynamics illustrates the intricate relationships between currency movements, investment strategies, and asset price fluctuations.