TA Tuesday: Analysing FOMO, Powell’s speech, and derivative trends

Although the macro indicators were in line with forecasts, Powell’s speech last Thursday stirred the pot.
While he indicated the Fed’s intention to keep current interest rates on hold at the upcoming meeting, he did not rule out the possibility of future hikes in the face of robust economic growth.
Two statements caught my eye:

1. I think the evidence is that policy is not too tight at the moment.
2. The current fiscal path we are on is unsustainable.

At the moment, the probability of no rate hike dominates the 1 November target rates, with the first easing expected at the meeting in June 2024.

I interpret Powell’s stance as an attempt to soothe the market, with the aim of lowering short-term yields and steepening the long-term yield curve.
This is likely to have a negative impact on companies without free cash flow negatively, with the S&P 500 triggering an equity downturn if it falls below the 4,200 mark.

And again… no hike (inflationary), potential war spending (inflationary), and robust real economy (inflationary) makes defensive assets and commodities attractive.
USD, gold, and again the digital gold thesis come to mind: BTC.

Looking ahead:
Powell will speak again on Wednesday.
Thursday brings the ECB rate decision (no hike expected) and US GDP.
Friday’s agenda includes US PCE (let us keep an eye on deflation).

On the FX side:

With the DXY in a downtrend, the standout performer is the EUR, which has recently made an upside breakout.
In the short term, I am inclined to go long on the EUR, but on a macro level, I maintain my view that the ECB may find it difficult to keep rates on hold for an extended period of time.
I am looking for the DXY to reach 105, at which point I will be looking for H&S.

As always, a weaker USD tends to benefit BTC on the whole.
That said, my current view is that we are entering a new regime where this kind of beta/correlation becomes less important. And I personally see this as bullish for crypto.

On the crypto side:

FOMO is back.
For the first time in a while, I find myself caught up in this — which was not the typical feeling during the days of LUNA and FTX, where my feelings tended more towards questioning my choices in the crypto space.

It is undeniably a favourable moment for crypto enthusiasts, especially bitcoin maximalists, as BTC dominance flirts with the 54% mark.

Last week, I hinted at the possibility of a spot squeeze looming, which has indeed materialised.

Currently, I believe that the trading activity between $32.5k and $35k is largely being driven by a short squeeze.
Deribit funding rates (perps basis) are historically high, driven not only by traders taking long positions, but more importantly by options traders finding themselves short gamma around the $33k mark.

Chart 3: Deribit funding rates

I have the same bias when looking at the skew.
While the skew now naturally favours calls, what may surprise some is the presence of OTM puts trading with the same volatility as ATM options.
This is what the “sticky strike” smile looks like when the market is one-sided and the market makers are short the upside gamma.

Taking all of this into consideration, I believe that $35.5k has psychological significance as a resistance level, potentially taking us back to pre-Luna levels.
In this high volatility environment, $32.5k serves as a crucial support level.

On the derivatives front, I personally find skew trading attractive due to the perceived underpricing of puts.
However, managing the delta and the vol-of-vol comes with its own set of challenges.
On the spot side, I expect that by the end of the week, we will see developments – perhaps involving market makers facing significant losses or regulatory action from the SEC. That will influence the price action.

Chart 4: BTCUSD 1d