In the event of major economic slowdowns, central banks often push out controversial policies such as interest rate cuts or take even more drastic measures by venturing into negative interest rate territory. What this means simply is that banks will essentially pay you to borrow from them, while savers will have to pay fees to the banks for keeping their money.
This might sound counterintuitive at first but it is for good reason. With market downturns, businesses stop expanding and people start to hoard physical cash. Lowering the cost of capital will promote investments and business expansions while making it a loss to let your money sit in the bank will encourage people to spend and take on riskier investment vihecles.
One country that has adopted and implemented this negative interest rate policy is Japan, where it has been in place for more than a decade, as well as some European countries such as Denmark where banks pay its citizens to take out loans.
The European Central Bank (ECB) pushed for the negative interest rate of -0.1% since June 2014 as an attempt to stimulate the economy. The Bank of Japan (BoJ) announced a similar policy in March 2016 to soften the yen to mitigate the effect on the country’s export industry. Recently, the Bank of England has, for the first time, issued the sales of three-year treasury bonds with -0.003% return rate.
When we take a deeper look at the U.S. Federal Funds Rate, there is a clear trend that the U.S. central bank has been constantly cutting their rates to near zero. If the trend continues, interest rates will eventually go into negative territory by December. However, Jerome Powell, Chairman of the Federal Reserve, has reiterated during an interview with 60-Minutes last week that the U.S. will not employ this strategy and will continue to inject more liquidity into the markets using quantitative easing policies.
All in all, the negative interest rate policy has to be handled carefully as it may backfire, especially when many investors see such a policy as a sign of weakness in the real sector. Stock markets and commodities tied to the real sector like oil and gas can react violently to the uncertain economic climate.
The diminishing returns in the traditional markets will drive investors to seek a better investment vehicle and store of value. As a result, safe-haven assets such as gold and bitcoin have already shown strengths and yielded top year-to-date returns in 2020.
You may also want to read: Battle of Safe-Haven Assets: Bitcoin Trumps Gold In Terms of YTD Returns
Bitcoin Technical Analysis
Bitcoin is still hanging on to the mid-term uptrend (in yellow) while the next level of support are the daily EMA89 (in blue) and the bottom of the Bollinger band (in green.)
The significant resistance remains at $10,000 which is both a psychological and Fibonacci resistance level. If Bitcoin cannot shoot up for a decisive breakout within this week, the mid-term outlook of Bitcoin will turn bearish resulting from the consecutive lower lows.
You may also want to read: Jeffrey Wernick’s Insights into Capital Markets, Bitcoin, Blockchain and More