Forex Implications | Protecting Your Money from Inflation ~ Part 2

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GMO-Z.com Trust Company

5 min readApr 27, 2021

As a company owned by a publicly listed Japanese company, we often rebalance our USD and JPY holdings. Today we will cover a few points that we’ve been looking into recently to hedge against USD or vice versa. In summary, here are three points that we observe. Important note: This is NOT financial advice, and it is just our view.

USD devaluation trend will continue;
The rising interest rate in the US will trigger reflation trades from time to time; and
It is important to closely watch the correlation between USD and major currencies such as EUR, JPY, and AUD which are impacted by economic policies.

Our CEO Ken Nakamura, in various conferences and media interviews, has always argued about the potential devaluation of dollars due to an aggressive policy to fight the covid pandemic. As you can see in the chart below, the dollar value has been in a downtrend throughout 2020.

The USD/JPY pair clung to the upper limit of the down channel amid strong US long-term interest rates following the Biden administration’s aggressive fiscal policy, and the short-term traders began to feel slightly uncomfortable with their positions. The motivation was triggered by the plunge in the US stock market at the end of January. The USD/JPY short was repurchased due to the risk positions’ reduction due to the stock price depreciation. Short holders who were late to escape suffered losses as the dollar rose, so USD buys, and JPY sells had chained reactions.

Even in a long-term downtrend, this kind of reflationary trade happens from time to time, pushing the dollar price higher against JPY or other major currencies. However, the long-term trend hasn’t changed based on our observation. The “Trump rally” back in 2016 when he won the election is a good example. A common view on if Hillary Clinton won the presidency in 2016 was that the democratic party would not be able to take many economic measures; hence the dollar depreciation will continue. However, following Trump’s victory, a partial establishment of the fiscal policy created a strong reflation trade effect, as you can see in the below chart. The current rally was driven by Biden’s fiscal policy, which many think is unsustainable, can potentially follow a similar price action seen in the Trump Rally, getting back on track with a downward trend in the medium to long term.

Now let’s talk Crypto

In our previous blog post, we touched on why inflation is on its way and the risks we are exposed to. If you are a true believer in cryptocurrency, digital assets, and blockchain, Bitcoin is a great way to hedge and protect your asset from inflation. We are in the middle of a paradigm shift with Bitcoin and blockchain gaining more and more attention, especially in recent years. Bitcoin was created in 2009 following the 2008 financial crisis, with the hope of replacing the current monetary system. Over the course of 10+ years, it is at a point where no one can ignore the innovation anymore and has drawn established financial institutions to enter the market.

A few of the important problems Bitcoin will solve are:

Inflation,
Accountability; and
Transparency and privacy

Most importantly, Bitcoin is designed to prevent inflation. There is only 21,000,000 Bitcoin that can ever be mined whereas fiat money can theoretically be printed infinitely by the Fed.

What is the risk?

Well, most importantly you need to know what you are doing in order to safely store Bitcoin or any other cryptocurrencies. Unlike how you rely on banks and financial institutions to manage your money, you are on your own when it comes to managing cryptocurrencies. If you lose the private key of your wallet, you will lose your asset. It is estimated that roughly 20% of Bitcoin is locked by people who lost their private keys. One option is to keep your asset at the exchange of your choice, but remember you only control your Bitcoin only when you manage them in your own wallet. Unfortunately, cryptocurrency is still counter-intuitive for average users and further development of the ecosystem is critical to reaching mass adoption but the good news is that things are starting to come to fruition on the institutional level with banks and financial institutions aggressively entering the space. Institutions with big cryptocurrency portfolios have multiple options to safely store their assets with entities like Fidelity, Coinbase, and soon BNY Mellon! For those of you who don’t follow cryptocurrency-related news, here are a few notable pieces of news that validates the entry of reputable firms and why we think the development of the ecosystem will significantly accelerate in the next 12 to 24 months.

Did anyone wonder what stablecoins are reading through the articles above? We will not get into details in this post but you can learn more about it here. Stay tuned for our next blog!

DisclaimerThis content is not financial advice and it is not a recommendation to buy or sell any financial instruments, FX trading, cryptocurrency or engage in any trading or other activities. You must not rely on this content for any financial decisions. Acquiring, trading, and otherwise transacting with financial instruments or cryptocurrency involves significant risks.We strongly advise our readers to conduct their own independent research before engaging in any such activities.GMO Trust does not guarantee or imply that any cryptocurrency or activity described in this content is available or legal in any specific reader’s location. It is the reader’s responsibility to know the applicable laws in their country.

Forex Implications | Protecting Your Money from Inflation ~ Part 2

Written by GMO-Z.com Trust Company