At the time of writing, $BTC is trading at $29,486 (-7.23% in 7 days), $ETH is trading at $1,750 (-9.76% in 7 days), and the ETH/BTC spread is trading at 0.05938 (-2.74% in 7 days) as bitcoin outperformed most of the other cryptocurrencies.
The price action over this past week was fairly muted. With both BTC and ETH retracing back to around $29.5k and $1.8k after a small rally to the upside, it showed once again that spot prices, with no clear catalysts, are unable to inch and hold higher prices.
On the macro side – this week’s major events are the following:
1. Thursday, June 9, 2022: ECB rate decision (expected: 50bps hike)
2. Friday June 10 2022: US CPI numbers (expected: 8.3%YoY);
Last month, the US money supply (M2) recorded its first monthly contraction in 12 years.
This is the result of (i) Fed hikes, (ii) forward guidance, and reverse repos (RRP) at an all-time high. Given the high overnight interest rates, money market funds simply prefer to park their money at the Fed.
The Fed is about to start shrinking its $8.9T balance sheet by $3.3T of banks reserves.
Over the last two years, it bought roughly $4.6T of Treasuries and mortgage-backed securities through Quantitative Easing (QE) to keep longer-term interest rates low and stimulate the economy.
Of the $4.6T of assets in the money-market industry, roughly $4T is invested with funds that are allowed to invest only in high-quality, short-term assets like T-Bills and REPO.
This time it is still unclear how the Quantitative Tightening (QT) Program will affect bank reserves. Normally, banks reduce their own reserves, thus draining money from the system and undoing the impact of QE.
As of now, I see three different scenarios as liquidity drain:
1. Rise in short term rates
2. Money Market Funds away from RRP and back to Private Markets
3. Banks becoming reluctant to add Treasuries or government agency mortgage-backed securities to their portfolios.
I believe the market impact will not be immediate, but the fact that the Fed has not already specified how it will proceed makes me think that they too are scared of the market reactions.
Should the short-term funding rates increase faster than unexpected, the Fed will have to find a way to incentivise institutions to hold reserves. Otherwise, the private sector will simply be unable to absorb that cash.
On June 15, $15B of treasuries are set to mature and get out of the Fed Balance Sheet. I’ll be watching the money market very closely.
The sentiment has now skewed into “bad news is good news” as any negative news would force the Fed to slow down with the QT plans.
Without a doubt, all of the above will weigh on crypto prices.
On the crypto side – I expect prices to keep being range bound and skewed on the negative side as no positive news comes in. Indeed, any positive news or a positive sentiment will push prices up, but not as much as negative news or a negative sentiment would push them down.
Futures keep being quiet as Open Interest is stable WoW, and both the basis and the funding are unchanged and are not reacting to spot moves.
On the options side: skews keep being largely negative and in favour of puts as traders still look for downside protection.
In terms of flows:
– BTC open interest keeps being well diversified, with a strong support at $25k and resistance at $30k and $40k.
– ETH call spreads in September keep being popular, as traders would like to profit from the possible merge.