The Merge went smoothly and successfully, but it was a nightmare for all volatility buyers. Now, we have another week of macro headlines and key interest rate decisions.
On the macro side:
- Wednesday, September 21st: FOMC rate decision (cons: 3.25%; previously: 2.5%): implied 75bps hike
- Thursday, September 22nd: SNB rate decision (cons: 0.5%; previously: -0.25%); implied 75bps hike
- Thursday, September 22nd: BoE rate decision (cons: 2.25%; previously: 1.75%); implied 50bps hike
- Friday, September 23rd: Fed Chair Powell is scheduled to speak
With no doubt the most followed and most influential event is the FOMC rate decision. The 100 bps rate hike is now “priced in” with a probability of 16%. Last week, Core CPI rose 0.6% MoM and all measures of CPI numbers were above their median forecast. To be honest, as long as the US labour market remains stable, I do not see any reason why we should see a Fed pivot. At the moment, I am skewed to a 100 bps hike rather than 75 bps.
Nevertheless, I expect the following scenarios:
- 50 bps hike: risk-on market; tech and digital assets higher
- 75 bps hike: non-event
- 100 bps hike: risk-off market; tech and digital assets lower
US 1Y Yield is now 4.0683% (!!) and US investment-grade bond yields are 5.14% on average, which is the highest they have been since 2009. Fewer than 15% of S&P500 stocks have dividend yields greater than these yields. So, why should investors risk their capital?
Over the course of the week, I expect to see a stronger dollar (currently DXY: 109.46) and a stable CHF (currently SFC: 91.92).
In addition to this, Europe is well behind the curve. I do expect a lower EUR against both USD (currently EURUSD: 1.0027) and CHF (currently EURCHF: 0.9665).
On the crypto side:
- Crypto Total Market Cap: $902.86B
- $BTC: $19,448 (-13.14% WoW)
- $ETH: $1,365 (-20.48% WoW)
- $SOL: $32.51 (-13.17% WoW)
Going into the Merge, there was massive vol priced in as the ETH weekly ATM implied volatility was 140% prior to the merge. It then dropped to 94% immediately afterwards, while the realised volatility was unchanged throughout the whole event.
Similarly, the ETH-BTC Implied Volatility spread dropped across the term structure, but the volatility premiums are still large. I see an increased appetite for ETH downside as a high-beta trade into the FOMC rate decisions (long BTC, short ETH).
BTC ATM implied volatility term structure is in contango with weekly maturities below 70% vol. I think being long volatility and short delta into the FOMC is a nice volatility trade here.
ETH was once again unable to hold higher prices and to break the $1,800 resistance. A hawkish Fed will see ETH approaching the $1,200 support and ETHBTC at 0.065.