The Federal Reserve has been in its blackout period ahead of its latest monetary policy decision this week. No doubt many Fed Presidents are itching to head towards the microphone once Powell’s Reserve publishes its latest policy decision. The bond market has been flashing warning signals as we have covered with fair value models suggesting current market pricing it’s far too flattering of the value of benchmark bonds. Current conditions, especially liquidity, within the bond market are dire, exacerbating both the cognitive dissonance between fair value and market pricing and the likely fall out of this bond-buying cycle. To put things into perspective, look at the interest rate swap market. This paper trading market shows that as much as 100 basis points (1%) of previously anticipated rate hike has been priced back out from interest rate expectations. With initial expectations over the horizon of the traded curve only slightly over double that number at the start of this year, the expected post-covid bounce back in yields even in a state of continued record borrowing has been halved.
Given the chasm between valuations and prices, money is chasing after the fact that yields should begin to rise once again. Provided they do and before inflation continues to rise yet further and faster, USD could continue to grind higher. Given the low volatility prices in over the lighter summer period, perhaps don’t expect the bond-sellers to overwhelm markets just yet.
The logic for buying Bitcoin is opaque but defined loosely enough such as to create predictable and identifiable price patterns within the alternative asset class. One such influence over supply and demand and thus price action is the extent to which people buy into the cryptocurrency when they have high confidence and limited constrains upon cash and a freedom of allocative choice for such cash. Okay I’m trying to be nice about crypto for once – you buy it because you can’t think of anything better to do with the money and feel like chancing a buck. But chancing a buck is seldom a feeling isolated to one (in this case niche) asset class. While the US Dollar has been picking up strength recently as fears over growth and the Delta variant spread, Bitcoin sank to recent lows. The alternative asset class looked set to break some fundamental technical levels and potentially set up it’s fate for a significant sell-off. This week has been a different story. Having defended its 50-day moving average, USDBTC is now eyeing up the $40,000 mark – far from record highs but several thousand bucks higher than its recent valuations. There are idiosyncratic factors behind the crypto asset’s appreciation including speculation over its use within Amazon and other online marketplaces. However, it could be a sign of stronger risk sentiment and be a precursor to firmer broader market conditions.
Discussion and Analysis by Charles Porter
Click Here to Subscribe to the SGM-FX Newsletter
Related Insights
Morning Brief – Short covering
Charles Porter
Thu 17 Nov 2022
Short covering Evidence from the CME provides an interesting qualification to the CFTC positioning data that GBP investors have been watching closely. For many years now, markets have held a net short position on GBP, fluctuating from more neutral grounds through to a heavy focus upon achieving selling conviction behind the Pound at times. […]
Morning Brief – US CPI
Charles Porter
Thu 10 Nov 2022
US CPI The risk-on mood that kicked off the week has slowly deteriorated, providing a reality check for currencies including those in the EM basket and GBP. Initial optimism surrounding China’s zero-covid potential policy adjustment and the passing of two key central bank risk events last week had supported currencies that have typically suffered […]
Morning Brief – USD risk
Charles Porter
Tue 8 Nov 2022
USD risk The hawkish narrative that the Federal Reserve delivered in its latest press conference has been well covered. Jay Powell’s divergence from how the market perceived the peak of US interest rates has provided an element of support to the US Dollar. We can say with conviction that at least in the hours […]
