The yuan is at its highest level in 14 months amid a split between the Federal Reserve, the Bank of Japan, and the People's Bank of China - the impact on cryptocurrencies
The Chinese yuan has risen to its highest level in 14 months against the dollar on Monday, adding another layer of complexity to an already troubled macro environment for risk assets, including cryptocurrencies.
The world's three largest central banks are now moving in markedly different directions. The Federal Reserve just delivered a sharp rate cut, the Bank of Japan is poised to raise rates this week, while the People's Bank of China navigates yuan strength amid a slowdown in the domestic economy. For cryptocurrency markets caught in global liquidity currents, risks have rarely been higher.
The yuan's rise is due to dollar weakness.
The local yuan rose to 7.0498 per dollar as of 08:30 AM UTC, the strongest level since October 2024. The currency continued to gain throughout Monday's Asian trading session, strengthening from 7.0508 at the beginning of trading.
The move came despite a weaker-than-expected directive from the People's Bank of China, which set its daily fixing at 7.0656 - weaker than market estimates - in a seemingly deliberate attempt to slow the currency's appreciation.
Analysts attribute the strength of the yuan primarily to general dollar weakness rather than domestic factors. Seasonal demand at year-end also played a role, as Chinese exporters typically tend to convert a larger share of foreign currency revenues to meet various payment and management requirements.
The yuan is expected to remain close to 7.05 until the end of the year but with limited room for further appreciation, as the People's Bank of China is unlikely to tolerate sharp gains. At the same time, exports remain a key driver of economic growth.
A rate hike from the Bank of Japan looms as the U.S. Federal Reserve's hawkish cuts add to uncertainty.
The yuan's move comes just days before the Bank of Japan's policy meeting on December 18-19, where officials are reportedly ending the 25 basis point interest rate hike that will bring the policy rate to 0.75%.
The potential increase ignited fears about the unwinding of the yen deal. In early August, a similar dynamic led to a sharp decline across global markets, with Bitcoin dropping more than 15% in a single day when leveraged positions were liquidated.
Market participants will be closely watching comments from Bank of Japan Governor Kazuo Ueda after the meeting. A dovish tone on future rate hikes may help mitigate any market impact.
Last week, the Federal Reserve delivered its third consecutive rate cut, lowering the federal funds rate to 3.50%-3.75%. However, the decision was noted as hawkish, with the dot plot indicating only one additional cut in 2026.
Federal Reserve Chair Jerome Powell cited tariffs as a key factor in inflation concerns, while three committee members opposed - the most since September 2019.
Implications for the cryptocurrency market
For cryptocurrency markets, divergent central bank policies present a mixed picture. Typically, a weaker dollar supports Bitcoin and other digital assets as alternatives for value retention. However, potential liquidity shrinkage caused by unwinding yen trades may offset these gains.
Recent ETF flow data indicates limited buying momentum. On December 12, dedicated Bitcoin ETFs recorded net inflows of only $49 million, with BlackRock’s IBIT accounting for nearly all purchases at $51 million. The remaining 11 ETFs either saw zero inflows or minor outflows.
This indicates a significant slowdown compared to daily flow peaks in November that exceeded $500 million, raising questions about whether institutional demand can provide enough support if macro-driven selling escalates.
With the Bank of Japan's decision approaching mid-week and year-end liquidity conditions tightening, cryptocurrency traders should prepare for high volatility in upcoming sessions.$BTC
