Bitcoin dips below $65,000 despite soft US inflation data

What's next for Bitcoin's price?

Market Movements

Global Macro Market Observations

?? US CPI inflation softens to 3.3% in May vs 3.4% forecast

?? US Fed held interest rate steady 5.25%-5.5% range

?? US annual PPI inflation declines 2.2% in May

Treasury yields were a major mover for the week. The 10-year Treasury yield fell nearly 22 basis points to close at 4.22%, on the back of weaker-than-expected Consumer Price Index (CPI) and Producer Price Index (PPI) data and juxtaposed with what seemed like risk-off price action into the tail end of the week. Both CPI and PPI prints were encouraging, though price action dovetailed to indicate some worry about a deflationary (versus disinflationary) impulse that would be bad for risk assets as a whole.

Still, major United States indices finished strong on the week, with another new all-time high notched by the Standard & Poor’s 500 Index (S&P 500) on Wednesday. Nvidia and Apple were notable gainers over the week at 9.58% and 7.72% respectively.

United States Dollar (USD) strength momentum from last Friday’s Nonfarm Payrolls (NFP) carried into the week. While the Wednesday CPI print caused a pullback, it was brief as the Federal Open Market Committee’s (FOMC) surprise hawkish stance resumed the strong USD theme. The weakness in the Euro (EUR) and Japanese Yen (JPY), on the back of French election jitters and lack of action by the Bank of Japan (BOJ), were prime contributors to USD strength on Friday. The USD/JPY exchange rate broke above 158 in the wake of the BOJ meeting, where a lack of clarity on plans to reduce Japanese Government Bond (JGB) bond buying contributed to the sharp spike in USD/JPY. Later, derisking in EUR and French stocks took over, with EUR spiralling down to trade around 1.0680 and the French CAC 40 Index plunging 2.66% on the day.

Malaysia Market Observations

?? BNM considering more measures to prop up ringgit, says deputy governor

?? Ringgit ends the week lower at 4.7190 versus US dollar

?? LHDN conducts special ops to curb tax leakage from cryptocurrency trading

USD/MYR traded higher to start the week, adjusting to the Nonfarm Payrolls (NFP) print from the previous Friday.

The pair kept pace with most regional currencies over the week’s events, but stayed comfortably above 4.70 despite strong local bond activity this week.

This trend was the likely catalyst that prompted Bank Negara to announce that they are considering more measures to support the ringgit on top of already engaging corporates to bring back foreign currency funds.

The risk off tone that dominated global markets in the latter part of the week affected Malaysia capital markets. The KLCI slipped 0.65% during the week to end at 1,607. Malaysian government bonds were net slightly worse off after starting the week on a bullish tone.

This made for an interesting and rare week where despite capital losses on most parts of the yield curve, the carry from coupons was enough to see government bonds as a whole still in the black for Week 24:

In this environment, corporate bonds continued to see gains as local players chased corporate spreads to the thinnest margins. On Thursday 13 June 2024, Digi Telecommunications Sdn Bhd closed their book on a RM1.0bn issuance of Islamic Medium Term Notes with the 5 year priced at 3.85% and 7 year at 3.93%. That’s a spread of around 20 and 15 basis points respectively; a far cry from the typical 50 basis points rule of thumb for a AAA-rated corporate sukuk.

Crypto Market Observations

?? Bitcoin Falls 1% to $67,017 as Fed Rate Cut Forecasts Boost Dollar

?? Ether ETFs Should Be Fully Approved by September, Says SEC Chair Gensler

??DeFi Giant Curve Roiled as Founder’s Loans Get Liquidated; CRV Slides 30%

Crypto majors traded weakly. Despite perceived correlation to US equity risk, crypto price

action diverged in the wake of the FOMC meeting. While initially rallying in tandem after the CPI print, Bitcoin and Ether failed to hold those gains (compared to the SPX500 staying pretty near its new all-time highs), and dropped back into the low end of the range on Thursday. Majors continued to stay pressured on Friday, with the break of $66,200 in BTC causing another round of liquidations as the price flashed to just over $65,000. Similarly, Ether price broke through $3,450 to touch a low of $3,362 on Binance. ETH’s recovery from there has been encouraging though, with price once again on the cusp of $3,600 at the time of writing.

Early readers of this publication might recall last year’s incident with the Curve (CRV) token, where a huge DeFi loan taken out by CRV founder Michael Egorov was at risk of liquidation, putting Curve and several core DeFi protocols at risk of being saddled with a huge amount of bad debt. While the previous incident was resolved, history once again repeated itself as CRV prices had once again been falling to the point where Egorov’s existing positions were in danger of being liquidated. Except this time, the piper demanded to be paid.

CRV hit the price liquidation threshold of 34 cents, where some $140 million of outstanding CRV tokens were called. Fortunately, outstanding loans on core DeFi providers like Aave and Frax Finance were either small, had been paid off, or had mitigating measures to ensure orderly liquidation. Nonetheless, CRV took a quick plunge through the liquidation level, trading down to 22 cents in fairly short order before dip buyers emerged.

What We Are Monitoring For The Week Ahead

Looking Ahead: Our Insights

Despite the Fed’s more hawkish dot plot this week, markets are still pricing in two rate cuts for the year. September Fed Fund Futures imply a 61% chance of a cut at that meeting, followed by another potential cut in December. The data is supportive of such a view, with PPI data confirming the slower CPI print (plus PPI actually feeding more into the PCE metric which the Fed prefers over CPI). Another slow NFP + CPI print in July should cement at least one rate cut before the US election.

There’re plenty of opinions about how the political nature of rate cuts ahead of the elections might affect the actual decisions made by the Fed. A cut too close to the election would not only be seen as overly political, but would also not feed the wealth effect enough to matter. Inflation as a whole has not quite gone away, which puts the Fed in a tight spot of choosing between growth and inflation (they have been worried about the former in the past, but now seem to straddle again after the last meeting). Some mention that the fiscal spending plans of either potential administration imply that there is no way the Fed can tame inflation without continuing its restrictive stance. Where does that leave us? If the coming data does indeed show that a rate cut is needed, September will likely be a lock. Failing that, there will likely not be a cut at least until the election is over.

Price action in treasury yields imply a more risk off reaction function from the market, vs. a market chasing the easing of financial conditions. This has likely been driven by the angst coming out of France, with President Macron threatening to resign if his party loses the coming lower house elections. Losing the lower house does not actually put a major dent in his legislative power though, so it’s entirely possible that this is an empty threat (which worked in the previous presidential election). The derisking in French assets and the EUR is hence likely a cautionary response by the market as opposed to one that is pricing in a full blown regime shift to the right. The market tends to fade those moves as the dust settles.

The price action in crypto majors has not been indicative of a risk on market, especially compared to US equity indices, which are now at new all time highs. For instance, Bitcoin rapidly pushed higher in the wake of the CPI print, pushing past $68,000 to attempt another breach of $70,000. The entire move was unwound in the wake of the FOMC meeting, vs. the SPX 500 which kept most of its gains. Further weakness was observed into Friday’s close, with further long liquidations and a reduction in OI as reported by Coinglass.

While macro data seems to point to easier financial conditions ahead, crypto majors are trading on the weaker side. Dip buyers seemed to emerge in earnest for ETH, which did reject the $3,340/50 support level in this move lower, and has since traded higher. The technical picture in other majors is more murky, with support in Bitcoin only emerging nearer to $64,000 and at $132 for Solana. It’s probably best to wait for better levels to enter in the range, vs. trying to force a position right here in the middle.

Not surprisingly, Thursday and Friday were net outflow days for Bitcoin ETFs, to the tune of over $400 million in outflows over those two days. There has been some speculation that a significant portion of the inflow into these spot ETFs were from hedge funds looking to put on a cash-carry basis trade, by going long spot (or a spot proxy in this case), and short on Bitcoin CME futures to lock in the basis difference between the two instruments.

Analysis from market observers on X, using CFTC positioning data, does seem to indicate that anywhere from 20–40% of ETF inflows could be attributed to hedge fund flows for their cash-carry arbitrage trades. While theoretically market risk neutral, derisking activities could potentially result in a poorer sentiment overall, where the mass market sees the outflows as the headline number, and reacts accordingly.

In an odd twist, the CRV liquidation event is probably a net positive for the DeFi space as a whole. It removes the overhang of systemic risk from the system, for that was what Mich Egorov’s massive position was. It also helped that the liquidation was orderly. Last year’s near miss likely introduced stronger risk management practices for affected protocols, including measures such as introducing off-chain liquidation arrangements. Dip buying activity ended up being fairly strong ahead of 20 cents — hourly CRV token volumes on Binance eclipsed that of the liquidation candle by a healthy margin (150 million traded from 34 cents to 22 cents, vs. 450 million traded in the subsequent hour).

Thank you for reading and we’ll see you next week!

Team Halogen

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