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Currency war returns, conditions favorable for bitcoin

Nik Bhatia

Sep 27

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Dear Readers,

Since the FOMC lowered policy rates by 50 basis points last Wednesday, I can’t help but feel we just experienced a regime shift. Today’s letter will explore what started this feeling, juxtapose the various large moves in financial markets, and use our common sense to flesh out what’s happening. Powell, China, the dollar, gold, stocks, and bitcoin will all fight for attention throughout this analysis. Currency wars never stop, they just pause for a breather.

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Questions I’m asking myself

Now that FOMC is committed to aggressive cuts, will we avoid a recession because of it (soft landing)?
If stocks and gold are behaving like this, why isn’t bitcoin?
Why did I add 15-minute cross-asset candles to my monitor this week?
Are stocks and gold trading up on the same story of global rate cuts?
What will happen to bitcoin if it breaches its all-time high?
Was China’s easing move a reaction to the Fed?
Has a currency war resumed?
And of course, what does it all mean?

Trying to wrap our heads around it

With the news that China would slash interest rates and start providing leverage for equity holders, investors quickly moved past last week’s rate cut to the latest and greatest reason for a pump. However, when combining the two stories and analyzing them as one, it’s almost too obvious that the FOMC’s decision to stoke the leveraged fire by lowering rates was met by an equal and opposite reaction from the Chinese central bank a few days later.

If the Fed is moving the dollar lower by lowering rates, one might expect China to engage in currency weakening moves as a reaction—we all know that China doesn’t like a currency too strong out of fear of losing international competitiveness. This week, however, China’s policy moves strengthened its currency, leading us to look deeper under the hood. What I found is that when money-creation impulse is so strong, marginal changes in the exchange rate become entirely irrelevant. The next phase of currency war is here...

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