Bitcoin’s breakout above $74,000 on Monday was aided by Japan.
Bank of Japan Governor Kazuo Ueda cooled expectations of an interest rate hike at the next monetary policy meeting on April 28, signaling a more cautious stance amid uncertainty over how the Iran war will affect Japan’s economy.
Such decisions have been shown to extend to the cryptocurrency market in previous years. On August 5, 2024, a surprise BOJ rate hike triggered a sell-off of the yen carry trade that sent bitcoin crashing from $64,000 to $49,000 in 48 hours.
The carry trade, where investors borrow cheaply in yen and deploy into higher-yielding assets, including cryptocurrencies, had become one of the largest sources of exposure to leveraged risk assets globally. A fall in the yen tends to cause rapid selling of risk assets, with bitcoin and major cryptocurrencies being the first to be affected.
But Ueda just noted that trade will remain intact for at least another month. Japan’s 20-year bond auction on Tuesday attracted its highest demand since 2019, with a bid-to-cover ratio of 4.82 versus a 12-month average of 3.27, confirming that institutional capital agrees that the rally cycle is stopping.
Twenty-year yields, near their highest level since 1997, fell nine basis points after the auction.
A dovish BOJ keeps the yen weak, currently near 160 against the dollar. A weak yen keeps carry trade financing cheap. Cheap carry financing supports leveraged positions in all risk assets, including the perpetual futures markets where the bitcoin rally is building.
Data from last week showed $2.1 billion in new bitcoin open interest and $2.2 billion in ether open interest in the 24 hours after the ceasefire, and coin-denominated OI confirmed new net long positions. Part of that positioning may be financed, directly or indirectly, by the same yen liquidity that Ueda just preserved.
Japan is also among the economies most exposed to the Strait of Hormuz, through which more than 90% of its oil imports flow.
If talks between the United States and Iran produce a deal and oil prices continue to fall, Japan’s inflation pressure will ease further, giving the Bank of Japan even less reason to raise rates and widening the window in which the carry trade supports risk assets.
As such, the BOJ’s caution is one more tailwind behind bitcoin’s breakout. The $73,000 ceiling held for six weeks in part because macroeconomic headwinds, from oil to rates to geopolitics, gave leveraged traders no reason to push it.
