Typically, a greater flow of new dollars to target lower interest rates inflates the prices of equities and fixed-income bonds.
Since the advent of cryptocurrencies, financial markets have found that this new asset class is especially responsive to interest rates and bears an inverse correlation to them.
Correlation Spotted: Bitcoin and Interest Rates
A recent report from the Fidelity Active Investor Learning Center notes, “While central banks do not control cryptocurrencies, some crypto analysts have observed that the US central bank in particular may be indirectly influencing the price of crypto.”
Meanwhile, according to an SPGlobal report, the daily rolling three-month correlation between interest rates and the crypto index have exhibited an inverse relationship of 63% of the time since May 2017. That correlation rises to 75% of the time since May 2020.
China, Canada, and South Africa on Brink of Rate Cuts
When the U.S. suspended the direct convertibility of dollars to gold in 1971 to prevent a massive outflow of the yellow metal from its economy, it created a foreign currency market of free-floating exchange rates.
This has a direct influence on the profitability of imports/exports and trade balances between major international trading partners. As a result, the Fed’s move to ease rates soon gives China room for cuts.
Between the favorability of US policy to a Chinese interest rate cut and a deflationary trend in the yuan that threatens to spiral, yuan watchers expect a shift in monetary policy there soon.
Bank of Canada governor Tiff Macklem said in a recent interview that the nation’s central bank is ready for bigger rate cuts than the ones introduced earlier this year.
Meanwhile, South African rand watchers expect the country’s Reserve Bank to announce an interest rate cut later this week.
‘Soft Landing’ Could Boost ‘Hard’ Money Like Bitcoin
While the monetary engineers at the Fed and other central banks prepare to ease economies into another soft landing, Bitcoin and other cryptocurrencies have responded with enthusiastic optimism.
BitMEX founder and crypto influencer Arthur Hayes recently said he thinks the USD money printer firing up a fresh round of rate cuts will drastically increase BTC’s price.
He emphasized the monetary influence on BTC will materialize fast and that the results will be dramatic.
“They will ramp up the money printer and dramatically increase the money supply,” Hayes said. “That leads to inflation, which could be bad for certain types of businesses. But for assets in finite supply like Bitcoin, it will provide a trip at lightspeed 2 Da Moon!”
Hayes closed his short Bitcoin position earlier this month and admitted that he made only a modest profit.