It is going to be an eventful week. CPI numbers and the Merge.
On the macro side:
Once again, it is CPI numbers release week. US CPI YoY for the month of August is expected to be 8.1%; previously it was 8.5%. Nevertheless, target rate probabilities for the Fed meeting on September 21st are 300-325bps (probability is 90%, i.e. 75 bps hike). The US Yield term structure is still in backwardation, starting from the 1y until the 10y, with the 10y Yield trading at 3.341% (+50.4bp MoM). On average, the entire term structure shifted up by 42.875bps MoM.
USD weakened over the week as DXY is now sitting at 108.226 from its previous high at 110.78 on Sept 7th. Since then, EURUSD has been trading at 1.0128 (2% WoW) and CHFUSD has been trading at 1.0502 (3.02% WoW).
I still believe Europe is well behind the curve despite a 75bps hike, which will go into effect from Sept 14th.
On the crypto side:
It is merge week (!!).
This is probably the most awaited crypto event so far, and is scheduled to happen this Thursday (precisely when TTD of 58750000000000000000000 is reached). You can find a nice countdown here.
Over the last week, traders have been positioning themselves, given the 3mth rolling basis of BTC and ETH decoupling from net 0 down to a 8.92% discount for ETH on FTX.
At the time of writing, the 3mth Basis is trading at 2.23% for BTC on FTX and -4.06% for ETH (this is a spread of 5.88%).
Many traders are already unwinding their long spot/short futures as a consequence of the following:
- Discounting ETH PoW to lower prices (implied price from futures spread is: $19.7)
- Profit taking on calendar-spread: ETH 3mo basis was 2% and is now -4.06%.
- Staking rewards on ETH PoS should be around 4-5% ann., which means that a long-term future spread should be around these values.
Perpetual Futures are now also stepping in. ETH and BTC funding rates, typically off set in the past, are now trading at -50.04% APY for ETH and +6.75% for BTC. I am expecting the ETH APY to go crazy as we come closer to the Merge (now ETH Pow is priced 1% of ETH PoS; funding rates should then go up to -365% ann.)
On the spot side: BTC has outperformed all the others as a trader was pushing (with 1,000) lots of weekly options. The weekly implied vol went from 65% to 75%, and the spot soon followed. BTC market cap dominance is 41.6% up from 39% on Sept 9th.
Looking at the Realized Volatility cones:
- BTC realized vol has been trading at 78.35% during a 7-day window, which is near the top 25% of historical distribution. Similarly, the weekly ATM implied volatility has been trading at 79.4%.
- ETH realized vol has been trading at 57.46% during a 7-day window, which is below the bottom 25% of historical distribution (!!). The weekly ATM implied volatility has been trading at 116%, which is a 58% volatility premium.
- The spread between the realized vol of ETH and BTC is negative for both the 7-day and 14-day windows, which is something that rarely happens. Different, too, is that the spread between the implied volatilities is largely positive.
I am expecting the realized vol of ETH to also pick up soon as the Merge approaches, and we might see limited liquidity on the exchanges and lending protocols.
ETH was once again unable to break the $1,750-$1,800 resistance. I am expecting fireworks during this week, but the resistance is still $1,800-$2,000 for ETH, and the support is at $1,200. Similarly, ETH/BTC is back at 0.076 as it was unable to hold 0.085.