Drumroll Please
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Macro
Global markets reversed course this week with risk assets recovering sharply from last week’s selloff.
Last week’s narrative about dollar domination cooled off as the dollar sold off, weakening vs a basket of other currencies. The ECB (European Central Bank) announced a 75bps rate hike earlier this week from 0, raising to the highest levels since 2011. They doubled down on their resolve to keep fighting inflation by raising rates.
This had substantial effects on currency markets. The Euro and the Yen have been getting served a beatdown recently due to the rising spread in interest rates between them and the US. High interest rates make holding the native currency more attractive, generating demand from other currencies to swap into yours. This is similar to how lending protocols with the highest rates relative to its reputation and security tend to get the most TVL.
High interest rates in the US relative to Europe and Japan caused a massive inflow of foreign demand of dollars and US debt.
As Arthur Hayes pointed out earlier this year, this has been quite disastrous for the energy policies in these respective countries. Their relatively inelastic energy demands are denominated in US dollars, costing more and more of their native currency to heat their homes.
All eyes are now on US interest rate policy this week. The CPI print will be very impactful in deciding the narrative. The market is extremely confident in a 75 bps rate hike this upcoming meeting, potentially signalling that being short in this market was getting quite crowded this week.
Though Powell demonstrated impressive resolve at Jackson Hole, some are questioning whether he will be able to walk the walk. Sustaining terminal rates of 4%+ would mean that the Fed would pay an expensive bill to investment banks parking their capital in reverse repos, which could face some political pressure from Congress.
The markets seem eager to test the resolve of the Powell. The past week’s rally demonstrates the quick return of boldness of risk assets betting that something will break.
This week will surely be one to keep us at the edge of our seat.
Bitcoin
Despite the Ethereum Merge expected to happen this week on Sep 15., Bitcoin led price action this week with an impressive recovery off of lows of $18,800.
Asian hour price rips have quickly brought the orange coin back out of the doldrums and eyeing to reclaim August’s open.
Implied and Realized volatility has steadily climbed back up.
Skew has made an impressive recovery from lows back up to 0, indicating a very fast change in market upside vs. downside outlook for volatility in the coming week.
Ethereum
Expected Merge volatility still hasn’t materialized for Ethereum yet as we inch closer to the anticipated Sep 15 date.
Ethereum skews remain roughly unchanged. Bitcoin led moves indicate that macro narratives are dominating this week despite the Merge.
Solana
SOL recovered quite well following the fall before taking a backseat to Bitcoin moves over the weekend.
Volt Performance
Friktion earned $109,054 last week for its depositors.
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