The FOMC has followed through with its expected plan and increased rates by 25 basis points to 5.00-5.25%. The decision was unanimous. The Fed has also hinted at a possible pause in rate hikes by eliminating the language that suggested more policy firming may be necessary to achieve a sufficiently restrictive stance.

The Fed has stated that it will take into account policy lags, tightening to date, and other developments when determining whether additional policy firming is required.

The Fed has acknowledged that tighter credit conditions could have a negative impact on the economy, hiring, and inflation. However, the Fed has also noted that job gains have been strong and inflation remains elevated.

During the press conference, Fed Chair Powell emphasized the importance of the dual mandate and their commitment to reducing inflation back down to 2%. The Fed will take a data-dependent approach to determine the need for further rate hikes. Powell acknowledged that inflation is still above the targeted goal, with continued high pressure, but it has moderated slightly. There is still much work to be done to decrease inflation, and the Fed is ready to take further action if necessary.

During the Q&A session, Fed Chair Powell clarified that while no decision was made on a pause, the recent statement change holds significant meaning. Going forward, the Fed will be guided by incoming data and will assess whether they have reached a sufficiently restrictive level in each meeting. Powell also noted that the Senior Loan Officer Opinion Survey aligns with banks tightening lending standards and the pace of lending slowing.

The Committee acknowledges that inflation is unlikely to decrease rapidly and it may not be appropriate to cut rates. There was considerable support for a rate hike, although not as much for a pause in this meeting. Powell concluded by stating that they are approaching the end and feel they are close to their goals.

SVB Financial, a Californnia-based lender to the venture capital industry, has been hit extremely hard, and the losses are now sparking speculation that this will affect other banks and affect the bond portfolios of US banks.

SVB Financial

So the recent news surrounding overnight losses incurred by Californian bank SVB Financial has raised serious issues regarding unrealized losses on bond portfolios and their impact on bank capitalization levels.

The Federal Deposit Insurance (FDIC) projected that the US banks had around $620bn of unrealized losses on securities that were held to maturity or available for sale accounts. This will have implications on the Forex markets too.

The most notable impact of this news was an immediate deleveraging of open FX positions. This was seen through large losses in EMFX currencies, such as the Mexican peso and Hungarian forint, which dropped 2.2% and 0.8%, respectively.

G10 currencies experienced a more mixed result, with higher-beta currencies such as the Canadian dollar and Norwegian Krone losing around 0.3% of their value against the US dollar.

The outperformed was the Swiss Franc, which gained 1.1% against the US dollar. The outperformance may have been partly due to the traditional safe-heaven status of the currency, as well as the recent commitment by the Swiss National Bank to prevent any significant weakening in the franc.

The US dollar experienced a similar mixed result due to both the sell-off in US equities and potential implications of the development of the US banking system and the Fed's ability to push ahead with the previously planned aggressive tightening cycle. That and the US 2-year Treasury yield drop over the last 2 days alone.

Overall, the news of overnight losses has serious implications for FX markets. Monitor further developments in the US banking system.

The most obvious victims will be the Nasdaq and Cryptocurrency. It doesn't help much either that tech stocks have been performing relatively well considering all the rate hikes, but this leaves tech stocks vulnerable to the downside as there wasn't enough hedging taking place.

EURUSD

A recent shift in the SVB Financial-influenced Federal Reserve Curve and its effect on the 2-year EUR:USD swap differential.

The FED sets a benchmark interest rate (Federal Funds rate) and other short-term borrowing costs, which helps to determine market-determined interest rates.

The SVB Financial-inspired repricing of the Federal Reserve Curve results from the shift in market expectations regarding the Fed. The Federal Reserve has recently expressed its hawkish views on future economic policy, leading the market to expect higher interest rates. This has influenced steepening of the yield curve, and long-term rates are increasing faster than short-term rates as investors demand higher returns from longer-term investments in a higher-rate environment.

The steepening of the yield curve has significantly impacted the 2-year EUR:USD swap differential. A swap differential happens when investors or company exchanges rates between 2 different currencies, usually for the purpose of hedging their currency exposure

Right now, the 2-year EUR:USD swap differential has narrowed by 20bps for the euro over the last 2 days. Indicating that the euro's value has strengthened relative to the USD dollar, providing support to EURUSD.

A soft NFP job release could be seen as a sign that the Federal Reserve doesn't have to be as hawkish in its monetary policy as Jerome Powell previously suggested. This can result in a weakening of the US dollar, which could lead to a further narrowing of the 2-year EUR/USD swap differential in favor of the Euro and potentially send the EUR/USD back to its starting level of ~1.07 (This already happened but I originally posted this in my newsletter. You can find the link in my bio)

The effects of this shift in the yield curve have also been felt in other currencies.  As we advance, there may be some upside risks to the value of the koruna, but this is unlikely to have a major impact on the Czech National Bank's policy settings.

All in all, the recent shift in the yield curve, as caused by the SVB financial-inspired repricing of the Federal Reserve Curve, has had a marked effect on the 2-year EUR/USD swap differential, sending the euro's value higher.

As we advance, there may be some upside risks to the value of the koruna, but this is unlikely to have a major impact on the Czech National Bank's policy.

#SVB #nasdaq #crypto #EUR

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Ethereum ecosystem is on a journey that could redefine staking for its validators due to the Shanghai upgrade.

By March, validators can withdraw ETH that has been locked since December 2020, which could happen partially or wholly. Partial withdrawal will mean validators can only withdraw the accrued rewards, not their initial staked Ethereum. Those who opt for a full withdrawal will completely exit the network.

The upgrade requires validators to update their withdrawal credentials beforehand. Currently, only 60% of the half-million validators have done so, and the rest needs to do this seen.

The rewards will automatically be sent to the address of those who have updated their credentials. In case of a full withdrawal, a validator must manually request an exit.

A maximum of seven exits can be processed in the network per epoch every ~6.4 minutes, which works out to 1600 validators' exits daily. If many validators chose to exit simultaneously, the difficulty and delay could be longer as the process is slow.

An influx of liquid staking protocols like Likdo has also been seen. These protocols enable ether holders to stake fractions of Ethereum without the need to post a minimum of 32ETH threshold.

Not only that, these liquid staking protocols provide liquidity for staked assets that would otherwise be locked. By the time the upgrade goes live, the derivative token of these liquid staking protocols should converge in parity with the underlying asset.

StETH to ETH ratio

The shanghai upgrade and liquid staking protocols have created opportunities for retail investors that could not previously stake due to the 32 minimum stake amount threshold. That has led to these protocols becoming some of the biggest DeFi players, with Lido surpassing MarkerDAO in terms of Total Value Locked (TVL).

TVL

All in all, the coming months will be an exciting time for the Ethereum network, with staking getting a much-needed boost in the form of the Shanghai upgrade and liquid staking protocols providing much-needed liquidity for staked assets.

Lido's Dominance of the Liquid Staking Space Raises Concerns

The ethereum network is constantly evolving, and with this evolution comes opportunities. Last September, "The merge" was a monumental part of this evolution, bringing considerable benefits such as reducing power consumption and Ethereum's inflation rate.

Unfortunately, this merge has also increased centralization as a select few entities, such as liquid staking protocols, now hold a majority of the staked Ethereum. Currently, Lido is the largest liquidity provider in the staking space, commanding more than 30$ of the market share of staked ETH and a higher share in the overall liquid staking space.

This concentration of ETH has caused some concerns among people within the ecosystem, leaving them to ask how this might impact the security and health of the Ethereum network, which is yet to be seen; this will be an important issue to watch in the coming months.

Ethereum staking share of various providers

Shanghai Upgrade to Increase Ethereum Staking Yield Significantly

The upcoming Shanghai upgrade is expected to cause a major shift in Ethereum's staking ability & yield. Currently, each validator with 32 ETH is getting a total staking yield of 7.4%, including variable rewards from transaction fees, tips, and MEV (Maximum Extractable Value).

Compared to other Major PoS networks such as Avalanche (AVAX), BNB, Polkadot, and Solana. Ethereum has a relatively low staking ratio of only 14%, so after the upgrade, there's room for the staking ratio to increase to the average of the networks, which is ~60%

The staking ratio of major PoS blockchains

If that happens, the number of validators would jump from 0.5 million to 2.2 million, and the yield would decrease from 7.4% to around 5%, therefore with the Shanghai upgrade, Ethereum has the potential to become one of the leading PoS players within the crypto space and offer rewarding yields to validators.

Number of validators in the x-axis and yield of the y-axis 

Monitor The Standard Block Rewards and Variable Rewards

Explaining this graph of the validators and the yield

Assume you are a validator on the Ethereum network, responsible for confirming and processing transactions. As a validator, your main goal is to maximize your staking yield, which is determined by the number of validators present in the network. The graph illustrates how the staking yields correlate with the number of validators in the network.

The increase in standard block rewards to the validator set as the number of validators increases that increases the standard block reward helps to offset the variable rewards such as transaction fees, fee bumps given by the users to prioritize certain transactions, and MEV, which are rewards earned through reordering transactions before sending them into a block on the network. As more people use the network and more activity is present, the variable rewards earned will also increase and contribute to your overall staking yield.

By keeping track of the rewards earned along with the stand block rewards, you can be sure to experience the highest staking yield possible, helping you to take advantage.

#ETH #ethereumshanghaiupgrade #Ethereum

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Crypto funding activity in the month of January was expected to be relatively large but instead registered a “big fat zero.”

This reflects a temporary lull in the crypto market, where crypto funding activity for the month of January was significantly lower than had been anticipated.

For perspective, the crypto funding activity for January was estimated to be around $6 billion. All other months were estimated to have lower amounts, with the lowest amount estimated at around $0.5 billion in December.

This shows an unexpected decrease in crypto funding activity in the month of January compared to all other months.

This crypto doughnut may be the result of a combination of factors, such as bearish sentiment in the crypto market, decreased investor interest in crypto, regulatory uncertainty, or other external factors.

It is also important to understand what this lull in crypto funding activity in January could mean for the future of the crypto market and to stay up-to-date on any developments that could have an impact on crypto funding.

$bn per month 2022

January: ~6

February: ~5.8

March: ~4.5

April: ~7

May: ~4.8

June: ~4

August: ~1.4

September: ~1.5

October: ~0.6

November: ~0.6

December: ~0.5

image source JPMorgan

In November 2021, the Bitcoin mining sector saw a surge in activity due to a combination of factors. The value of Bitcoin at that time was at an all-time high of $67,734, while the Hash Spread reached a record high of $550 per Megawatt Hour (MWh). These high prices and mining margins attracted new capital from investors looking to capitalize on the potential profits available in the sector.

Additionally, competition in the sector had been reduced in the period leading up to this boom due to China’s ban on Bitcoin mining, making the sector more attractive for new entrants. With these high prices and margins, investors were enticed to the sector by the promise of rapid investment payback periods.

However, once these investments were made (investors aping in), the profits diminished, putting pressure on the businesses and miners with the final result, yes, you guessed it, Insolvency. A tale as old as time.

Bitcoin mining lenders and borrowers find themselves in a difficult financial position and resort to bankruptcy. This is likely due to the current profitability of the mining operations' inability to service the financial obligations they agreed to.

Bitcoin is currently undergoing a difficult market cycle. This cycle is notable because investment from institutional miners played a much bigger role than in past cycles. The current downturn looks like the classic pattern of a boom and bust business cycle, as always. (The boom and unavoidable bust is just a part of capitalism. There's always a bust; it's never "different this time")

Talking about difficulty, let's look at the mining difficulty.

Traders are trying to find the bottom of the market. At the same time, credit markets are providing excellent opportunities for investors to earn high yields in a low-price environment with the potential for recovery.

Therefore, instead of predicting when the cycle will end, it is best to focus on having a disciplined capital strategy to prepare for the next cycle.

Therefore, disciplined capital should be utilized to gain the most from the current situation.

Also credits to One River Digital Asset Management LLC for their research

The Bank Of Japan (BOJ) is the central bank of Japan, and it has recently become known as the biggest money printer due to its large-scale bond-buying program.

This program, known as "Quantitative Monetary Easing" (QQE), has caused the BOJ's balance sheet to expand significantly since it was implemented.

The Bank of Japan announced its decision to adopt a "Yield Curve Control" (YCC) policy on September 20 and 21, 2016.

Yield Curve Control

YCC is a form of quantitative easing (QE) that involves the BOJ targeting a specific level for long-term interest rates to stimulate economic growth and achieve its inflation target. The BOJ first introduced QQE (Quantitative and Qualitative Monetary Easing) in 2013, and the decision to adopt YCC was seen as a tweak to this policy.

Under YCC, the BOJ announced that it would aim to keep the 10-year Japanese Government Bond (JGB) yield at around 0% by purchasing a certain amount each month. The BOJ's decision to adopt YCC was part of its efforts to stimulate the economy and achieve its 2% inflation target, which it had been struggling to achieve through traditional QE measures.

However, the bank of Japan recently made an announcement, which I will try to summarize.

The Bank of Japan (BOJ) made a surprise decision on Tuesday that allows long-term interest rates to move 50 basis points on either side of its 0% target, wider than the previous 25 basis point band, but has kept its yield target unchanged.

They also increased their monthly purchases of Japanese government bonds (JGBs) to 9 trillion yen ($67.5 billion) per month from the previous 7.3 trillion yen. This will help sustain current monetary easing policies and not signal a withdrawal of stimulus.

More info can be found here: https://www.boj.or.jp/en/announcements/release_2022/k221220a.pdf

The effect of this policy decision is to make the Bank Of Japan still provide large amounts of stimulus, but the money printing machine is no longer running as voluminously. By increasing the band within which long-term interest rates may move and increasing their monthly bond purchases, the BOJ is attempting to sustain its current monetary easing policies. This policy decision may impact the JGB market and other related markets, potentially increasing demand or decreasing supply in the near term.

Summarized

BOJ is lowering the minimum price they're willing to buy for bonds. The yield goes higher & cost of borrowing for the government goes up. However, it's a surprise since they told us they wouldn't do this! Because it's similar to raising the interest rate. Narrator: they did

BOJ has had to intervene multiple times. It is only a matter of time before the consequences of their reckless monetary policy become apparent BOJ is in trouble. They unwittingly move toward their undoing.

So by implementing a yield curve control policy, which involves buying bonds to keep the yield curve in its preferred shape. This policy resulted in the Bank of Japan printing more Yen, which has put downward pressure on the Yen and weakened its value.

To counter this, the Bank of Japan has been forced to intervene in the foreign exchange markets by selling foreign currency reserves, U.S. treasuries, and other bonds to buy back Yen.

This strategy has a finite lifespan; as it is playing out now, the Yen might keep falling as the rules of money take over. If the Bank of Japan keeps going in this direction, the yen's purchasing power will keep diminishing.

What does this mean for bitcoin?

As a result of the Bank of Japan's yield curve management program, market volatility and cryptocurrency demand are anticipated to grow.

Investors who are hoping to profit from the falling value of the Yen may be driving the rising demand for Bitcoin. Investors may choose Bitcoin and other cryptocurrencies as a hedge against the depreciating Yen, despite the fact that Bitcoin is inherently risky. As the Yen declines in value, more institutional investors may get access to the market.