The U.S. financial system has recently experienced two significant downturns in less than a month, highlighting an intriguing shift in the relationship between macroeconomic patterns and higher-risk assets. Should the U.S. economy sustain its momentum – exemplified by the addition of 256,000 jobs in December – the cryptocurrency market may witness an unforeseen transformation.
Given these circumstances, closely monitoring the economic schedule of the United States has never been more crucial.
Possible Surprising Prospects?
Despite the Dollar Index (DXY) comfortably sitting above 109 and the 10-year Treasury yield surging to 4.79% – reaching its highest level in 14 months – it might be tempting to believe that a shift towards riskier assets such as cryptocurrencies or equities is still distant.
The S&P 500 recently saw a market capitalization decline of $800 billion, dropping by 4.5% from its peak in December. Simultaneously, the cryptocurrency market plummeted by 8% within just one week, falling from $3.60 trillion. Based on these developments, the argument for steering clear of high-risk assets appears robust.
However, an intriguing element emerges with the surge of approximately $395 billion in net liquidity from the Federal Reserve since the year began. A significant liquidity influx might hint at a potential devaluation of the U.S. dollar, leading to a possible reduction in the purchasing power of each dollar.
Notably, the Dollar Index has recently reached record-high levels for four consecutive days, propelling its Relative Strength Index (RSI) into overbought territory. A price correction could be on the horizon, and if the dollar weakens, Treasuries may lose their appeal – a development worthy of close monitoring in the near future.
Adding a further dimension, speculations are emerging about liquidity injections originating from the Treasury General Account (TGA). As the U.S. approaches its debt ceiling, the Treasury might release substantial liquidity into the market. Consequently, this action could shake things up further in the upcoming weeks.
Remain Cautious Despite Market Dynamics
The substantial increase in liquidity from both the Federal Reserve and the U.S. government represents a bullish indicator, infusing fresh funds into the financial markets. With the anticipated “Trump pump” adding to the positive sentiment, the outlook appears optimistic – at least for the time being. Nevertheless, a caveat exists.
As the debt ceiling deadline looms closer, investors might pivot towards safer, more stable assets rather than plunging into the volatile cryptocurrency market.
Why? Treasury yields are anticipated to rise, especially as the Federal Reserve signals a reduction in rate cuts, with the government relying on them to raise funds.
While there is optimism, all focus now rests on the incoming administration. Will they implement tax reductions to unlock additional liquidity? If so, this move could devalue the dollar and diminish the attractiveness of Treasuries.
The stakes are high. Trump will need to demonstrate his commitment to fulfilling those pledges. Failure to do so could result in a turbulent period for riskier markets in the foreseeable future.