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The US Fed delivered another 25 bps rate cut on Wednesday the 18th, in-line with Street expectations. The knee-jerk reactions from the equity markets and the FX markets were muted, as the cuts were pretty much already priced in. While the outlook on the future rate policy remains mixed for now, how could the potential changes in macro policies alter capital flows and the possible impact on the cryptocurrency markets?
Meanwhile, the prices of Bitcoin have dipped to below the $10,000 psychological levels. At the same time, discussion about “altcoin season” has been heating up. How do traders and investors set the priority between Bitcoin and altcoins?
Party’s over … for now
The US Federal Reserve has made the biggest news headline in the markets when policymakers slashed the interest rates by a quarter of a percentage point for the second time this year. While this was a widely expected move, markets were being skeptical about the Fed’s next move. Chairman Jerome Powell “moderate” policy moves should be able to maintain the US expansion and stressed that the cut is a step to help the US economy remain strong. However, Powell also said, “weakness in global growth and trade policy have weighed on the economy.” The yes-and-no answer leaves the markets not much of a clue for the FOMC’s next move.
FOMC Participants’ Assessments of Appropriate Monetary Policy
The Fed certainly has the tools and room for policy maneuvers in the future. The question is whether the Fed will – and when to fire the shot. The latest dot plot (figure 1) shows that seven FOMC members expected one more cut this year, and five considered keeping the rates unchanged, and another five supported the interest rates going up. This means the FOMC members are extremely divided on how the interest rates should go.
“With the median dot in 2020 showing no change and hikes for 2021 and 2022, the Fed has softly signaled that this may be the end of their easing, and remained bullish on the dollar.”
Citi Economic Surprise Index (US)
One of the gauges that paints a rosy US growth picture is the Citi Economic Surprise Index (figure 2), which tracks how the economic data have been progressing relative to the consensus forecasts of market economists. A positive reading of the Index indicates that economic data have been better than Street consensus. The Index just popped up into the positive region in September and it seems to be developing a trend to go up further. No wonder the Fed seems to have no urgency to cut the rates even more.
Implications on Crypto
Changes in interest rates may not bring a direct impact to the cryptocurrency markets, but it certainly will alter the global capital flows, and this shift could potentially affect the crypto market in a macro way.
If we build on a dollar bull case, a strong dollar may not be the best for Bitcoin. The dollar index generally had a negative correlation with Bitcoin prices (figure 3), which means the DXY goes up, the prices of Bitcoin go down. This negative correlation is currently at its highest level in nearly six years.
BTC-DXY 90-Day Correlation Since Late 2012
While it seems too early to make any 2022 Bitcoin price forecasts, the changes in global capital flows undoubtedly are something that HODL investors should put on their radar.
Bitcoin or Altcoin?
While the prices of Bitcoin may be affected by the global capital flows over the long term, many investors have been asking if they should increase their altcoin exposure. The fact that altcoins have been gaining more attention in recent weeks, as the prices of major altcoins have surged dramatically, comments about the beginning of a new “altcoin season” have emerged throughout the internet.
We believe Bitcoin should remain as the primary focus despite the continuation of the consolidation. When you look at the weekly chart of some of the major altcoins (figure 3), it’s not hard to discover that they were still in a downtrend and far away from a real trend reversal.
ETH/LTC/EOS USDT Weekly Chart
However, for day traders, altcoins could provide more short-term chances as they usually have greater volatility while bitcoin has been trading sideways. Overall, the altcoin rally is short-lived and could be mainly driven by the recent sluggish price actions of bitcoin, once market focus return to bitcoin, altcoins could face a new round of selling pressure. Though, a diversified portfolio could capture the best of both worlds.
Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involve significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.
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