Bitcoin eating remittances in Nigeria. What the bond market is saying about inflation. S&P reaches all-time high ahead of the FOMC meeting this week.

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The Bitcoin Economic Calendar:

Week of Monday June 14th to Sunday June 20th.

Market Commentary:

Bitcoin: After doing a “head-fake” to the down-side midweek, bitcoin recovered and closed the week higher by +8.95%, at $39,013. It was a volatile week and that may continue into this week capping Sunday with a massive rally, helped in part by a tweet from Elon Musk stating that Tesla still holds most of its bitcoin and could accept bitcoin again in the future.

The news from El Salvador adopting Bitcoin as legal tender and what it could do to remittances into the country is shining the spotlight on how bitcoin is being used for remittances worldwide. A great example is Nigeria:

Recent reports indicate that U.S. dollar remittances into Nigeria are down -27.7% so far this year. The Nigerian government “sets” the Naira vs. USD exchange rate for all “official” remittances. This rate is ~17% lower than the open market exchange rate for dollars. This means that Nigerians abroad take a -17% loss when they use the “official” remittance channels to send dollars home. 

Does this mean Nigerians abroad are sending less money home?

No, it does not.

Bitcoin is now a more popular search term than Western Union in Nigeria, surpassing the term in interest for the first time a few months ago. Despite the Nigerian Central Bank’s efforts to get Nigerians to sell them their dollars at a discount, Nigerians are finding a better and more efficient way to remit money home using bitcoin and P2P exchanges. Bitcoin is eating Nigeria’s remittance volume - and it's benefiting Nigerians.  

How El Salvador navigates the relationship between its banking system, its citizens, and bitcoin could act as a playbook for other nations to follow. In one country, change is being brought about by their government. In the other, citizens are making the change despite the government. A fascinating case study to observe.

Turning to the markets, last week saw the largest one-week rise in short interest for bitcoin on Bitfinex, up +342%.

There are also reports that there is a large buildup in bitcoin balances in bitfinex relative to their recent volume. 

Putting these 2 together, it does look like someone could be getting ready to unload a large position. The technical backdrop for bitcoin still looks a bit fragile. It will be an interesting week - expect volatility.

S&P 500:  The S&P 500 reached an all-time high of 4,245 last week, up +0.39%. The Russell 2000 index also blew past the key level of 2,293. This was the confirmation signal of a broad-based rally continuation that Tom Lee from Fundstrat was waiting for. 

Mr. Lee’s view is consistent with price action in the Nasdaq, who’s index rose to within 43 points of its all-time high this past week. The trend looks poised to continue in the coming days unless it is “interrupted” by the Fed.

As we covered in the last issue, the Consumer Price Index reading for May that was released last Thursday was over 5% and exceeded analysts’ expectations.  

During the same period, however, the yield on the 10-year treasury had its worst weekly drop so far in 2021. It was down 6.18% to 1.41%. The yield on the 30-year Treasury bond was also down 3.89% to 2.15%. This dynamic is contradictory as higher inflation puts upward pressure on bond rates. But investors expressing their views in the market are saying something different. 

This price action means the bond market agrees with the Fed’s view of “transitory” inflation. Too many investors rode the wave from ~0.50% to ~1.5% and they are starting to take profit in what they believe is “peak” inflation.

It also appears that many “short bonds” positions are pre-emptively closing it out to prevent getting caught off guard by a sluggish inflation reading or strong jobs report. 

All eyes will be on the Fed’s FOMC meeting and Jerome Powell’s speech this Wednesday. 

Gold: Gold saw its second consecutive week of losses - down -0.70% at $1,876/oz. Price action may be impacted by the “transitory inflation” narrative; as we’ve seen above, some of the major commodities that were flying on the inflation narrative have come down significantly from their highs. Gold may see some headwinds as this investment narrative picks up steam. 

DeFi:  The FTX DeFi index and Ethereum were both down double-digits last week, a strong divergence from the price action in bitcoin. 

The DeFi index finished down -14% at 8,485 points and Ethereum was down -7% at $2,510.

Stablecoin balances continue to soar, with the combined market capitalization now at $106 Billion. Interestingly, the number of addresses holding over 1,000 Tethers (as a reference for the size of the market), is currently sitting at over 300,000. 

If we consider that all other stablecoins combined are about ~70% of Tether, assuming a similar distribution, that would mean ~500,000 unique wallets with balances over 1,000.  At the current pace, that number seems to be doubling every 6 months.

Difficulty Commentary: The most recent difficulty adjustment for bitcoin was a historic one. 

The early hours of Saturday morning saw miner signalling for taproot exceed 90% for this difficulty epoch. In other words, bitcoin’s first protocol update in 4 years has been locked in! That means that starting in block 709,632 (expected in mid-November this year), the new taproot rules will go live on bitcoin, enhancing bitcoin’s scalability and privacy, as well as paving the way for future upgrades.

On the mining difficulty side, the adjustment brought difficulty down -16% to 21 Terahash. The mempool is still relatively clear with fees of ~20 sats/vbyte usually more than enough to get a transaction into the next block.

What's ahead for the week:

Producer Price index comes out on Tuesday at 8.30 AM EST. Expectations is for a +0.6% increase - if the “fading” inflation thesis is at play, markets would likely cheer any increase below +0.6%. Producer Price index readings are referred to by some as leading indicators for consumer consumer price indexes. 

Fed’s Federal Open Market Committee meeting starts on Tuesday and ends on Wednesday the 16th with an announcement at 2pm EST and a press conference by Jerome Powell at 2:30pm EST. There’s a high potential that it will move markets. 

The bond market is agreeing with the Fed. Many investors with short treasury bond exposure are now covering their positions. This is consistent with some market observers calling the May inflation reading “peak heat”, and expecting a fade after this report. Look for bond yields to rally higher if we continue getting inflation readings over 2.5%. This would be consistent with what we are seeing in lumber prices, which have been in free fall over the last 3 weeks. Over the last 21 days, it has dropped by almost -33%, from ~$1,500/contract to about ~$1,050/contract currently. 

Lastly, on Thursday we get an industrial activity leading indicator in the Philly Fed Manufacturing index. Consensus is for a reading of 31.6 - the Fed would like to see a higher number signalling that employment is picking up. The market may celebrate a lower number as it means the Fed needs to keep supporting the labour market by keeping interest rates low.  

It's a big week coming up, and as always, we'll keep you posted on any relevant news throughout the week right here and from our Twitter account @hodlwithLedn

Canadian Central Banking Updates:
Current Target Interest Rate: 0.00 - 0.25%
Current Overnight Money Market Rate: 0.23%
Source: https://www.bankofcanada.ca/rates/

U.S. Central Banking Updates:
Current Fed Interest Target Rate: 0.00 - 0.25%
Current Effective Federal Funds Rate: 0.09%
Source: https://apps.newyorkfed.org/markets/autorates/fed%20funds 

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