Cristian Palusci2023-03-16

Is the liquidity crisis in the banking system the long-awaited buy signal?

The liquidity crisis that has hit the international banking system is forcing central banks to review their long-term interest rate hike programs. The implied policy rates of fed funds are impressive: within a week, we went from "higher for longer" (terminal rate at 6% and first cut in Q1 2024) to the first emergency cut already priced in June 2023. And in the meantime, gold and bitcoin are flying. One of the elements that represented a clear buy signal emerged immediately after the bankruptcy and related bailout of the Silycon Valley Bank: the Coinbase premium. And if initially the spread could have had a double interpretation following the depeg of USDC, in light of the recent price action it is clear that instead the premium indicated the enormous buy pressure on the exchange due to the fact that American investors considered the $20K area as a very interesting level. Finally, if we also take a look at the estimated leverage ratio, we see that we are far from the highs of October 2022, and this could represent further elements to fuel the rally when central banks formalize the pivot. Pivot that shouldn't be far away, at least according to the implied policy rate seen at the beginning of the post. Moreover, just this morning, the investment bank JP Morgan stated that the Fed's Bank Term Funding Program (BTFP) will inject $2 trillion into the financial system. And with a similar acronym, the buy the dip invitation seems pretty explicit.