Optimism has returned to the markets after the announcement of a peace deal between the US and Iran, along with the reopening of the Strait of Hormuz. This helped $BTC hit its highest levels in two weeks and caused oil to pull back sharply.
In my opinion, there’s a bigger event lurking behind the scenes, which is the Bank of Japan’s decision tomorrow.
But first, let me break down what investors are doing and why I've been warning about Japan for the past few months ⚠️
🔹️ What is Carry Trade?
Carry Trade is a strategy where investors borrow in a currency with very low interest rates (like the Japanese yen) and then convert the funds into assets or currencies that yield higher returns.
A simple example:
An investor borrows 100 million yen at near-zero interest rates.
Converts it into dollars.
Buys stocks, bonds, Bitcoin, or high-risk assets.
Profits from the yield difference and asset appreciation.
So, when interest rates in Japan were close to zero for a long time, the yen became a massive source of global liquidity.
🔹️ What is Unwinding Carry Trade?
When Japanese interest rates rise or the yen strengthens significantly, investors start to close these positions:
They sell Bitcoin, stocks, and risky assets.
They convert the funds back to yen.
They repay their loans.
This process is called Carry Trade Unwind.
The problem is that the size of these positions is massive, leading to rapid and violent sell-offs in the markets.
🔹️ Why is the crypto market scared of the Bank of Japan?
In the summer of 2024, when the Bank of Japan unexpectedly raised interest rates and the yen strengthened, global markets experienced significant Unwind activities that put immense pressure on risky assets, including Bitcoin.
The idea isn't that investors are selling Bitcoin because it's bad, but because they need liquidity to close their borrowed positions in yen.
🟢 The positive scenario for Bitcoin
If the Bank of Japan decides:
Interest rate stabilization.
Or raises it very slightly with a cautious tone.
The market may interpret this as the cheap liquidity coming from yen will continue.
Potential outcome:
✅ Continued risk appetite.
✅ Increased inflows into crypto.
✅ Potential for Bitcoin to keep climbing above recent highs.
✅ Alternative coins benefiting even more.
🔴 The negative scenario for Bitcoin
If the Bank of Japan:
By raising interest rates more than expected.
Or has signaled for further hikes in the coming months.
Investors might fear a new wave of Carry Trade Unwind.
Potential outcome:
❌ Strengthening of the Japanese yen.
❌ Liquidity withdrawal from risky assets.
❌ Selling pressure on US stocks and crypto.
❌ Increased volatility and possibly a sharp correction for Bitcoin in the short term.
👀 What are traders keeping an eye on more?
It's not just the interest rate decision, but also the statements from Governor Kazuo Ueda after the meeting.
Sometimes interest rates are stabilized, but if the bank hints at stronger monetary tightening in the future, the market might react negatively.
So, it's safe to say that the news of peace between the US and Iran has brought back some optimism to the markets, but the Bank of Japan's decision may determine whether this optimism lasts or turns into a quick profit-taking spree in the coming days. 👀📈