According to CoinDesk, the Chicago Federal Reserve's National Financial Conditions Index (NFCI) has fallen to -0.56, marking the loosest financial conditions since bitcoin's 2021 cycle high. The NFCI provides a weekly update on U.S. financial conditions across various markets, including money markets, debt and equity markets, and both traditional and shadow banking systems. A negative NFCI value indicates looser-than-average financial conditions, suggesting an environment where liquidity is more readily available, while a positive value indicates tighter-than-average conditions, where access to capital becomes more restrictive.
For the week ending September 13, the NFCI registered at -0.56, indicating that financial conditions have eased further from the already loose levels of the previous week. This level of financial ease hasn't been seen since November 2021, a period during which bitcoin reached its 2021 cycle high of $69,000. The relationship between the NFCI and bitcoin has been highlighted by Fejau, host of the Forward Guidance Podcast, who pointed out the negative correlation between the NFCI and bitcoin. Fejau argues that looser financial conditions often act as a tailwind for risky assets, including bitcoin, which tend to rally in such environments.
Fejau’s analysis traces this negative correlation across several market cycles. In 2013, as financial conditions eased, bitcoin surged from around $100 in July to over $1,000 by November, coinciding with the NFCI index registering a low of around -0.80. Similarly, in 2017-2018, the loosening of financial conditions coincided with bitcoin's dramatic rise from $2,000 to $20,000 in just six months at the end of 2017. However, during the COVID-19 pandemic, financial conditions tightened significantly, leading to a crash in both traditional risk assets and bitcoin.
Most recently, Fejau notes that as financial conditions have loosened over the past twelve months, bitcoin has once again surged, climbing from $25,000 to over $73,000 in March 2024 even before global central banks started to cut interest rates. This suggests that financial conditions have been loose for the past twelve months. However, this relationship is not entirely straightforward, with other factors like the DXY index (a measure of the U.S. dollar's strength) also influencing bitcoin's trajectory. A rising DXY tends to have negative implications for bitcoin, as a stronger dollar makes speculative assets less attractive.
As financial conditions continue to ease, the outlook for bitcoin and other speculative investments could remain positive, provided other economic factors remain supportive.
