Who directed today's big dump? It wasn't Powell's resignation letter, but rather Ueda's interest rate hike.

Written by: Oliver, Mars Finance

On December 1st, the crypto market, which was originally full of expectations, kicked off its closing month with a disastrous start.

On Sunday night Beijing time, Bitcoin plummeted without resistance from above $90,000, briefly touching $85,600, with a single-day drop of over 5%. The altcoin market was even more devastating, with the fear index soaring instantly.

The surface trigger is a shocking rumor that has been spreading wildly on social media: Federal Reserve Chairman Powell will announce his resignation on Monday night.

But this is just the surface.

In this information cocoon, traders are terrified by the political gossip from Washington, yet they ignore the truly fatal warning signals coming from Tokyo. This is not just an emotional outburst triggered by rumors, but a textbook-level global macro deleveraging.

The real power of short selling comes from the Bank of Japan, which is quietly closing the door on the world's largest free ATM.

Washington's Smoke Screen: The Nervous Bird of a Fragile Market

First, we need to break down the direct driving force behind the market crash.

The news about Powell's resignation on Monday night currently appears to be a typical FUD rumor. Powell's term does not end until 2026, and according to the official schedule, he is indeed set to give a public speech this Tuesday. The probability of a chairman who is about to deliver a regular speech resigning suddenly is extremely low.

But the question is, why did the market believe it?

Because the soil of rumors is real. This soil is the central bank political game of the Trump 2.0 era.

Just this morning, President-elect Trump publicly stated that he will soon announce the nominee for the next chair of the Federal Reserve. Currently, the frontrunner is Kevin Hassett, the former economic advisor to the White House and a prominent dove.

This has triggered a deep anxiety on Wall Street: the narrative of the shadow Federal Reserve chairman is coming true.

The market is not worried about Powell resigning voluntarily, but rather about him being undermined or pressured by political forces. If Hassett or other Trump loyalists are prematurely established as successors, then Powell's policy influence during the remainder of his term will be greatly diminished.

The fear of this power vacuum, combined with low liquidity over the weekend, turned a clumsy rumor into a weapon of mass destruction for short sellers.

Tokyo's Real Bomb: The Super Contraction Not Seen in 17 Years

If the rumors in Washington are the wind, then the bond market in Tokyo is the true banner in motion.

While we are focused on refreshing Twitter for Powell's news, a silent tsunami is happening in the Japanese financial market: the yield on Japan's 10-year government bonds has surged to around 1.1%, reaching its highest level since 2008.

This is not just a number, it is the end of an era.

1. Inflation can't be suppressed anymore. Data released over the weekend showed that Tokyo's core CPI in November rose by 2.8% year-on-year, far exceeding market expectations. This is the leading indicator that the Bank of Japan values the most. The data indicates that Japan's inflation has shifted from being input-driven to being endogenous, and the central bank no longer has any reason to maintain its easing policy.

2. The Hawkish Ultimatum Despite calls for caution from doves like Toyomi Nakamura, a louder hawkish voice has been heard in the market. The market is currently betting that the probability of the Bank of Japan raising interest rates on December 18th to 19th has surged to over 60%.

This means that Japan - the only country in the world that has implemented negative and zero interest rates for decades - is being forced to move towards normalization.

In-depth Analysis: The End of Yen Arbitrage Trading

Many crypto investors do not understand why interest rate changes far away in Tokyo can cause Bitcoin to plummet by $5000 in just one hour.

This involves the underlying architecture of the global financial markets - Yen Carry Trade.

To clarify this logic, we can use a familiar DeFi concept from the crypto world as an analogy.

1. The Japanese Yen is the largest stablecoin lending pool in the world. Imagine a DeFi protocol called the Bank of Japan. For decades, its lending rates have been almost 0%. For Wall Street hedge fund managers, the optimal strategy is to maximize borrowing. They borrow massive amounts of Yen from this protocol at almost no cost and then sell it for dollars.

2. The Leveraged Base of Global Assets With the exchanged US dollars in hand, these whales rushed towards high-yield assets:

Buy US Treasury bonds to obtain a 5% risk-free return.

Buy Nvidia and enjoy the dividends of the AI bubble.

Buy Bitcoin to gain high Beta returns brought by high volatility.

This is the engine of the global bull market over the past two years: borrowing Japan's cheap money to buy American risk assets. This is a leveraged structure worth trillions of dollars, and Bitcoin is just a part of this enormous asset portfolio.

3. Current Crisis: The Agreement Raises Interest Rates Now, the Bank of Japan, the administrator of this agreement, suddenly sends a signal: inflation is too high, and borrowing rates need to be raised from 0% to 0.25% or even higher.

This triggers a chain reaction:

Rising Costs: The cost of borrowing has increased, and the previously guaranteed profit margin has decreased.

Exchange Rate Risk: Because everyone is rushing to buy back yen to repay debts, the yen exchange rate has started to appreciate. When investors borrow, the exchange rate may be 150, but when they repay, it may change to 145, resulting in a loss on the principal due to the exchange rate.

Forced liquidation: In order to raise money to buy yen for debt repayment, institutions must sell their assets at any cost - U.S. Treasury bonds, tech stocks, and the most liquid asset that trades 24 hours a day, Bitcoin.

This is the essence of today's crash: global capital is being forced to deleverage. Bitcoin, as the canary in the coal mine for risk assets, is always the first to respond to liquidity contraction.

Can the Federal Reserve's interest rate cuts save us? 87.6% of optimism misaligned with reality.

In the face of Japan's betrayal, the market has placed all its last hopes on Wall Street.

The data seems to support this optimism. According to the latest CME FedWatch Tool, the market bets that the probability of a 25 basis point rate cut on December 10 has surged to 87.6%. Wall Street has nearly put all its chips on the “Powell will cut rates to save the market” card, believing this can hedge against Japan's tightening.

But this view may be overly optimistic and could even be a fatal misjudgment.

1. Structural forces are greater than cyclical forces. The Federal Reserve's interest rate cuts are cyclical adjustments, while Japan's interest rate hikes represent a structural historical reversal. When Japanese pension funds and life insurance companies find that domestic bond yields are approaching 1.1%, they are likely to withdraw funds from overseas back to Japan. This force of capital repatriation is tsunami-level, and a 25 basis point cut by the Federal Reserve cannot stop it at all.

2. The Squeeze of Bid-Ask Spread Narrowing The core of arbitrage trading is the USD/JPY interest rate differential.

If the Federal Reserve lowers interest rates as expected (with a 87.6% probability), the dollar yield will decrease.

If Japan raises interest rates, the cost of the yen will increase.

The result is that the spread is being squeezed in both directions. This not only cannot save arbitrage trading, but will instead accelerate the process of liquidation. Because the space for risk-free arbitrage is rapidly disappearing.

Therefore, even if the Federal Reserve really cuts interest rates, it can only soothe sentiment in the short term, but cannot change the long-term, structural siphon of Japanese yen capital inflow.

Conclusion: The Macro Double Kill in December

Standing at the starting point of December, we must clearly recognize that this month is no longer just a simple Christmas market, but a harsh macro stress test.

We are facing two major tests:

December 10: Can the Federal Reserve meet the 87.6% rate cut expectation and remain independent under Trump's political shadow?

December 19: Will the Bank of Japan press the nuclear button to end the zero interest rate era?

Today's plunge is just a rehearsal for the market in response to these two major tests.

For crypto investors, the current strategy should not be to gamble on the boring rumor of whether Powell will resign, but to closely monitor the USD/JPY exchange rate and the yield of Japan's 10-year government bonds.

As long as the yen continues to appreciate, and as long as Japanese bond yields are reaching new highs, the global deleveraging process will not be over. In the face of this gigantic macroeconomic meat grinder, any K-line technical analysis appears powerless.

Don't catch the flying knives. Wait for the wind in Tokyo to stop, then look at the clouds in Washington.