Arthur Hayes Explains the Impact of Interest Rate Cuts: Japanese Yen Against the Dollar is Key, Market Could Crash After Cuts
Maelstrom CIO and BitMEX Co-founder Arthur Hayes: Crypto Crash Imminent After First Fed Rate Cut
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Rate Cut a Bad Idea
During the Token2049 conference, Arthur Hayes, in an interview with CoinDesk, explained that the upcoming rate cut will exacerbate inflation and lead to a strengthening of the Japanese yen (JPY), triggering widespread risk aversion.
"A rate cut is a bad idea because the inflation problem persists in the US, and the government is the main driver of price pressure. If you lower the cost of borrowing, it will exacerbate inflation. The second reason is that the rate cut will reduce the interest rate differential between the US and Japan, which could lead to a sharp appreciation of the yen, triggering unwinding of yen carry trades."
Markets already experienced the disruptive effects of yen strengthening and subsequent yen carry trade unwinding in early August, when the Bank of Japan raised its benchmark borrowing rate from 0 to 0.25%. Bitcoin plunged from around $64,000 to $50,000 within a week.
Arthur Hayes emphasized that the "USD/JPY exchange rate" is the only important indicator in the short term.
Most analysts anticipate that the Bank of Japan will continue raising rates in the coming months, while the Fed will move in the opposite direction (rate cuts). This policy divergence implies that the yen could strengthen further, forcing investors to unwind risk assets financed by yen-denominated loans.
Arthur Hayes predicts that US interest rates will fall from the current 5.25% to 5.5% range to near-zero levels.
"The initial market reaction will be negative, and the central bank's response will be to cut rates further to curb the crisis. So I think the rate cut is a bad idea, but they will do it, and they will do it quickly to zero."
Ethereum's Opportunity to Reverse the Trend?
Near-zero interest rates may lead investors to once again seek alternative yield opportunities, bringing back into focus the yield-generating areas within the crypto market such as Ethereum, Ethena's USDe, and Pendle's Bitcoin staking.
Ethereum (ETH), currently offering a 4% annual staking yield, stands to benefit in a very low-interest rate environment. Ethena's USDe, which uses Bitcoin and Ethereum as backing assets and combines them with an equivalent perpetual futures short position to generate yield, and Pendle's Bitcoin staking, which offered floating yields as high as 45% last week, will all benefit from the low-interest rate environment. Meanwhile, market demand for products like tokenized bonds, which are affected by interest rates, might weaken.
