Bitcoin (BTC) rallied early Tuesday as a banking sector risk index rose, supporting a Fed rate hike halt. CoinDesk data show the leading cryptocurrency by market value reached a three-week high of $24,900, extending a three-day winning streak. Prices reversed the February dip from $25,000 to $19,500.
According to MacroMicro, the FRA-OIS spread, which measures how expensive it is for banks to borrow U.S. dollars from each rivals, rose to 54.00, the most since March 2020. The financial system relies on bank borrowing and lending to manage liquidity. When the interbank lending market is stretched or dysfunctional, banks risk insolvency due to liquidity risk.
Hence, the fast spike in FRA-OIS dissemination indicates system vulnerability. That increases the case for the Fed to suspend its rate hike cycle at next week’s meeting or opt for a 25-bps increase instead of the 50-bps projected last week. In one year, the central bank raised the official borrowing cost by 450 basis points, upsetting risk assets like cryptocurrencies.
“Bank stress supports Fed pause next week. The creator of the famous Crypto is Macro Now newsletter told CoinDesk that gold and bitcoin are likely to benefit from financial turmoil.”
As three U.S. banks failed in five days, including Silicon Valley Bank, the financial stress index rose, prompting investors to rethink interest rates.
The CME’s FedWatch program now predicts a 46% chance that the Fed will hold rates at 4.5%-4.75% next week.
Markus Thielen, head of research and strategy at crypto services company Matrixport, said financial sector stress may entail greater government liquidity guarantees. Bitcoin and cryptocurrencies are generally considered liquidity plays. “Financial market stress indices are at a decade-high. Credit default swaps, which reflect bond portfolio default insurance costs, have also risen. More government guarantees may mean more money printing, which benefits Bitcoin “Thielen told CoinDesk.
The spread is at its highest since the March 2020 coronavirus disaster. (MacroMicro) (MacroMicro) (MacroMicro) The FRA-OIS spread is higher than in recent weeks, although not as big as during the 2008 financial crisis. ING says the sudden rise from the recent range weakens the case for a 50 basis point rate hike. “It’s a market divergence from recent weeks’ narrow FRA/OIS spread. We noted that a tight spread implied the Fed could deliver a 50bp raise at the March meeting because the system was taking it quietly. Silicon Valley Bank’s bankruptcy changed that “ING analysts told clients Tuesday.
“The Fed wants a safer system. The system is more important than U.S. CPI [inflation statistics due on Tuesday] “analysts said. On Tuesday at 12:30 UTC, the BLS will report February inflation. Reuters expects the headline CPI to gain 0.4% month-on-month and drop to 6% from January’s 6.4%. The core CPI, which excludes volatile food and energy, is expected at 0.4% month-on-month and 5.5% year-on-year.