Crypto braces for a key risk: Japanese yen carry trade unwind

Bitcoin and most altcoins remained in a tight range as the crypto fear and greed index moved to the fear zone of 33 ahead of the Federal Reserve and Bank of Japan decisions.

Bitcoin (BTC) has been stuck below $60,000 this week while Ethereum (ETH) was below $2,400. Other big coins like Solana, Tron, and Litecoin were barely moved this week.

Bitcoin’s consolidation occurred as MicroStrategy, the largest corporate holder of Bitcoin, added more coins to its balance sheet. The company now holds 244,800 coins worth over $14.1 billion. Spot Bitcoin ETFs saw net inflows of over $144 million in the first four days of the week.

Ethereum, on the other hand, remained under pressure as ETF outflows continued, and as Vitalik Buterin and the Ethereum Foundation reportedly sold more coins. There are signs that more Ethereum whales are liquidating their tokens.

Federal Reserve and BoJ decisions ahead

Looking ahead, cryptocurrency prices could come under pressure next week as the Federal Reserve and the Bank of Japan meet.

The Fed is expected to cut interest rates following this week’s encouraging U.S. inflation data and last week’s mixed nonfarm payrolls report. The swap market is predicting a 0.50% interest rate cut at that meeting.

Economists expect that the BoJ will leave interest rates unchanged at 0.25%. However, as it did last time, the bank may catch the market by surprise by hiking interest rates again. In a recent statement, Kazuo Ueda, the bank’s governor, hinted that he may be ready to hike again if inflation remains high.

A Fed cut and a BoJ rate hike would reduce the spread between U.S. and Japanese yields, invalidating a carry trade that has existed for years.

In a carry trade, investors borrow from low-interest rate countries and invest in higher-interest rate ones. This likely explains why the Japanese yen rose to 140 against the U.S. dollar, a 13% increase from its lowest point this year.

The impact of this unwind could have an impact in the cryptocurrency industry as it happened in August. Bitcoin dropped to $49,000 while Ethereum fell to $2,100 in during the crypto Black Monday.

Therefore, there is a likelihood that Bitcoin, altcoins, and stocks will experience some volatility as the Fed and BoJ make their decisions on Sept. 18 and Sept. 20, respectively.