Dollar Reigns Supreme, Liquidity Runs The World

AUG 08, 2022 • 4 Min Read

Andrew Krohn

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🚨 In Case You Missed It

  • US Treasury imposed sanctions on Tornado Cash, banning American citizens from using the service.
  • Hodlnaut, Singapore-based crypto lending platform, halted withdrawals and token swaps amid liquidity concerns.
  • Beanstalk Farms has relaunched its stablecoin protocol, nearly 4 months after suffering from a $77 million exploit.
  • In celebration of International Friendship Day, Coca-Cola has launched a “share-to-reveal” NFT collection on Polygon.

📊 The Dollar Reigns Supreme

  • Since 2016, DXY has continually maintained a strong inverse correlation with BTC, which currently sits at a 5-year high of -0.87. In simple terms, as the DXY increases, BTC usually tends to fall, and vice versa.
  • The US Dollar Index (DXY) measures the value of the US Dollar against a basket of foreign currencies. Currently, the DXY is at a 20-year high with a value of 106.25.
  • Since August 2021, DXY has appreciated by 15%, whereas BTC has witnessed a 50%+ decline. While BTC has recently witnessed a slight recovery, the bulls will likely need a more defined break in DXY strength for a more sustained rally.
  • This week, we’ll get the CPI print for July on August 10 (Wednesday), which gives us data on consumer price inflation in the US. While June CPI’s print came in at 9.1%, July’s CPI print is expected to come in between 8.7-8.9%.
  • For more on macro market updates, Delphi members can read our latest Markets Insights report here.

Liquidity Runs The World

  • Global liquidity is very pro-cyclical. When liquidity is abundant, it reduces systemic risks and the immediate need for liquid safe assets. Risk appetite improves and capital providers are willing to finance and invest in longer duration opportunities like equities.
  • The rise in asset prices serves as a positive feedback loop as collateral values appreciate, which can be leveraged to expand credit and create new liquidity.
  • The expansions and contractions of global liquidity are cyclical, and right now we’re still in the downtrend of the cycle.
  • Global liquidity growth slowed considerably back in 2018 as financial conditions became more restrictive. The result was a sizable correction in risk assets, and a prolonged bear market for the most speculative long duration assets like crypto. We witnessed its power during the post-COVID bull run, and now again in the subsequent bear market.

  • We noted how common measures like M2 are only one part of global liquidity, but it serves as a decent proxy and its relationship with the crypto market is pretty telling.
  • The explosion in liquidity in the aftermath of COVID also led to a sharp rise in institutional inflows. Given today’s challenging macro backdrop, and the subsequent contraction in global liquidity, it’s no surprise institutional interest is a lot quieter now than it was 12 months prior.
  • Recessions tend to hurt profitability, which increases credit risk and reduces credit providers’ willingness to finance new and existing debts. Investors become more risk averse, asset prices fall, and those with the longest duration risk (e.g. high growth stocks, crypto) get hit the hardest. Balance sheet capacity is reduced as credit providers look to scale back risk; the drop in value and accessibility of collateral exacerbates this trend.
  • For more information, Delphi members can read the full Delphi Pro report here.

🐣 Notable Tweets

BTC Open Interest Surging

A Look Into MEV on Ethereum

Are Traders Still Underweight ETH?

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