The dollar is bottoming out, gold is down while Bitcoin is up, overall bullish in Q2
First, congratulations to friends who continue to follow the crypto space without fatigue. You should not have given up on the market yet?! 😆 This week, BTC rebounded significantly from 74k to 94k. For those in the car, you can take a breather, but we still need to cautiously welcome the turbulent year of 2025. I still believe that cryptocurrencies will outperform the stock market in 2025! In the stock market, you need to worry about the tariff war, while cryptocurrencies do not face tariffs, and there are many favorable policies. Tariffs are more destructive to market sentiment.
Tariffs are essentially tools that affect individual economies, but Trump turned them into weapons for the overall economy. There should be good news on tariff negotiations in the near future; we just need to pay attention to the negotiation situation. If the negotiations don't go smoothly, we will inevitably face another wave of negative impacts three months later (early July). I won't talk more about tariffs here.
The economic data for Q2 is a focal point that needs attention, as it relates to whether the US economy will truly enter a recession (I personally do not believe it will). This Wednesday, the S&P PMI data release is overall neutral to pessimistic. As shown in Figure 1, both the composite PMI and services PMI are turning downward, while the manufacturing PMI has slightly increased. Overall, it appears that economic activity has been affected by recent upheavals, and procurement managers have a more conservative view of future economic development, which is a warning sign. If PMI continues to soften, the probability of entering a recession will increase.
Recently, US Treasury Secretary Basent's remarks have somewhat alleviated market concerns about the economy (see Figure 2). He specifically mentioned his attitude towards a strong dollar (emphasizing the dollar's status as a reserve currency rather than its price), and the timing was very clever. The dollar has fallen significantly since early April after institutions de-leveraged, and many people online are spreading panic about a triple threat to the US stock, currency, and bond markets. It’s important to know that the dollar won’t collapse overnight, and the rise in US bond yields and the weakening dollar won’t continue indefinitely. The fundamental support for exchange rate value is determined by interest rate differentials. If we look at the recent comparison of US bonds with German bonds (or Japanese bonds) against the dollar, we can see that the dollar has significantly deviated from the interest rate differential trend (or the interest rate differential has significantly deviated from the dollar). As shown in Figure 3, the blue line (US-German differential) and the green line (dollar) have greatly diverged, and this divergence has reached extreme levels (as seen in the red circle below). There have been two similar significant divergence situations in the past four years: one during the pandemic in 2020 and another in early 2024. Interest rate differentials and exchange rates won't always diverge; they will eventually revert. I believe the dollar is already in a bottoming phase.
The strengthening of the dollar may be more related to reduced uncertainty in US policies and better economic performance compared to other countries. Currently, we don't see the market pricing in a significant reduction in interest rates. The probability of a 75 basis points rate cut within this year is 53%. The expectations for a significant rate cut have faded in recent weeks, but most countries globally are lowering rates (as shown in Figure 4, Europe has entered the Biden mode, and the implied interest rate in the US is approaching 3.32 a year later). This will still benefit market liquidity, and the support for cryptocurrencies will be more evident.
Speaking of liquidity, the recent continuous increase in liquidity is certainly a positive signal, but the overall financial environment has not yet loosened. I reviewed the Goldman Sachs FCI financial conditions index (see Figure 5) and other indicators analyzing liquidity and found that we are currently in a stage of credit distortion. This means that although liquidity has increased, it has not truly/all fully flowed into the risk market; more of it may have been absorbed by institutions or entered the reserve system. To put it simply, while the money supply has increased, it has not yet significantly transmitted to the market. The recent rise in cryptocurrencies is more likely driven by narratives rather than typical liquidity-driven markets. To me, this is actually a good thing, indicating that real capital markets are brewing. We are still at the front line of a bull market!
Improved market sentiment, policy and institutional narratives, and overall liquidity improvement are the main themes for Q2. Whether Q3 can continue to be good will depend on the upcoming developments (currently, I am personally more conservative). I believe Bitcoin has a chance to test 100k this month, and after a pullback at the end of the month, it will continue to rise. The reasons and views for market fluctuations can vary. If you believe Bitcoin is currently catching up to the gold trend (see Figure 6), you can check out my view on Gold vs Bitcoin from six days ago: https://x.com/kenjisrealm/status/1912899976084299830
🖤 Finally, I would like to add a note about ETH's strong performance in recent days. The fundamental data has slightly improved (I may share more later). Since the launch of the ETH short ETF, Wall Street hedge funds have been using this tool to short ETH, especially after the launch of ETHD last year, ETH has been firmly suppressed below 4,000. Recently, extreme bearish expectations have started to appear in the options market for the short ETH ETF (which indicates bullish sentiment towards ETH). As shown in Figures 7 and 8, the largest OI is P35, which is deep out-of-the-money, with an expiration date of 5/16. These positions are typically used by shorts to hedge against extreme risks. The three to six-month smile curve also shows that investors shorting ETH currently have strong hedging sentiment, meaning that ETH is starting to strengthen in the short term, and shorting institutions are beginning to hedge or choose to take opposite actions.
This update is somewhat late, but if you want to receive Kenji's views faster, you can also follow him on Twitter. I hope everyone hasn't given up yet. The market in 2025 may be bumpy, but it will ultimately lead to victory! I've been really busy lately with Blave. This year, my goal is to push Blave to the peak (hope it works 🤣), so I would appreciate everyone's support~
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I appreciate your attention and sharing. Thank you! 😛
#Market_Update #BTC
