The growing use of cryptocurrencies and the affect in banking system, financial markets, equities and monetary policy?

The first cryptocurrency appeared in 2009 in decentralized markets. They are not issued or endorsed by a central authority such as a government or a monetary financial institution. Acquisition can be done through the mining process in order to confirm the pending transactions. However, cryptocurrencies can be bought and sold through exchanges and stored electronically. The increase in exchange volume shows that it is now accepted, with famous banking systems changing and adapting to the rapid developments considering adopting a blockchain system similar to cryptocurrencies where peer-to-peer technology and decentralized system have the ability to upgrade the role of banks in the modern financial infrastructure. There is a favorable attitude towards the adoption of cryptocurrencies but also the investment by financial institutions in them.

The idea of ​​easy money and the growing volume of transactions with the constant fluctuations of prices in its short life cycle, not knowing the instability and the risk created many upheavals that hindered the wide acceptance as a means of investing and saving in the financial markets. The attempt to stabilize the price of currencies has led to fixed currencies where they can be pegged to a currency such as the dollar or to the price of a commodity such as gold having linked their market value to external factors and through algorithmic buying and selling mechanisms is restored. part of the short-term instability.

The main reason for the creation of cryptocurrencies is due to the use of encrypted transactions that guarantee some anonymity and transparency through the chain of blocks, thus reducing transaction costs as no intermediary is involved. Despite the advantages, the loss and exposure to digital risks is an important factor and in combination with the initial growth where it is located, raises many doubts in the universal use as a public through monetary exchange as it should maintain its purchasing power while keeping inflation as low as possible. , sufficient to encourage spending instead of storage.

The decentralized cryptocurrency system based on technology without an intermediary has the potential to replace a banking system in which a monetary policy is responsible for decisions that affect the economic fortunes of countries. An example is the financial crisis of 2008 where central banks had a negative impact on consumers and the economy as they were responsible for the debilitating recession. However, it suffers from multiple disadvantages including limited supply as it is a product of e-mining and the lack of legal status in most economies. Following technology, central banks are in the process of developing their own digital currency in order to remove intermediaries, thus reducing transaction fees, such as retail banks, and will use encryption to ensure that it is not copied or tampered with.

The reaction of central banks from around the globe on monetary policies during the global finance crisis of 2008.

After the emergency of the new variant of covid named Omicron (as Greek, let's call it o), bringing back up all the climb risk appetite with the greed level of markets dropping. Let's go back to remember an another case of a systemic crisis that bring and escalated to the global financial markets starting as a a mortgage crisis with over-indebtedness targeting buyers of low-income homes, excessive risk-taking by financial institutions and the creation of the United States real estate bubble. The initial approach with monetary policy tools with reductions in stock requirements, ie the required reserve that should be available and maintain the banking system (overnight at the treasuries or at the central bank), discount rate fluctuations charged by central banks to commercial banks as well as in open market operations with the central bank buying securities by adding cash to banks' reserves was found to be unsuccessful. It thus created the need to resort to a monetary policy to address the liquidity trap where it had been created.

The measures taken by the central banks such as (FED, ECB, BOC, BOJ, BOE) were aimed at quantitative easing, increasing the size of their balance sheet, which was mainly done by selling bonds as a rule with the primary goal of changing the overall reserve offer of the economy as they were formed and the amount of money stimulating market liquidity. But also the quality relaxation regarding the change of the structure of the data that the central bank has in its balance sheet as the assets where it held may have an increased risk in the relative price changes that may have an inflationary tendency. And finally with the commitment to provide future guidance to keep short-term interest rates low in order to help meet future monetary policy expectations.

Non-conventional instruments contributed to the easing of monetary policy after the zero interest rate was reached. Most studies find the cumulative effects of quantitative easing and future guidance on long-term government bond yields significant. Negative interest rates have been a very effective tool in reducing bond yields and the short-term yield curve that fell below zero after their implementation. Unconventional monetary policy has helped reduce corporate returns, raise stock prices and devalue the exchange rate.

It is observed that non-conventional monetary policy tools are more effective in times of heightened economic hardship where quantitative easing needs to be stronger and less effective when deflationary pressures increase. 

Citi FX weekly outlook

Soaring commodity prices remain a headwind to JPY as Japan remains a large net energy importer and thus higher energy prices tend to lead to lower Japanese terms of trade. But with USDJPY testing levels well above 114.00 recently that now leads to a weaker Yen real effective exchange rate at a level not seen for six years. Citi suggests that this may tempt the BoJ to now allow Yen rates to rise to stabilize alongside US yields to support the Yen somewhat at the current levels. USDJPY manages a sub 114.00 close on Friday with resistance seen at 114.50 -80 while first support comes at 113.25 (range lows) followed by 112.25 (October pivot).

Currently (as of Oct): 

• USDJPY: 6 – 12 months: 114.0 

• USDJPY: Longer term: 112.0

Previously 

• USDJPY: 6 – 12 months: 112.0 

• USDJPY: Longer term: 112.0

MT Bias: Turning neutral JPY vs USD & Tactically bearish JPY vs USD, SGD, AUD, NZD, CAD

Do we have a "TOP UP"

 We had many news corresponding this week. Japan October PPI +1.2% m/m (expected +0.4%), US October CPI +6.2% y/y (vs +5.8% expected), Japan's PM Kishida says wants to compile a further economic stimulus package on November 19. All joining the negative side of dollar but yet the yen collapse. Credit Suisse sold us USD/JPY set to soar as high as 123.00 but as the correlation displays the negative trait of USD with strength loosing over time and per stimulus to be issued of Japan's side, we intimating a bear run. We were right of the bear runs at the past, we did not run for bullish corrections as the main trend seems to have change. The yen is a light weight currency taken buy the strong dollar wind.