OTC Desk Market Update: Mixed Market Signals — Realized Volatility Rises after FOMC
Welcome back to our weekly market update! Here are the top things we’ll be paying attention to this week:
- U.S. Initial Jobless Claims on Friday.
- Options Expiry on Friday.
Macro
Holding the Line on Rates
In a widely expected move, the U.S. Federal Reserve held its benchmark short-term borrowing rate in a targeted range between 5.25%-5.50% on Wednesday. The federal funds rate has been at that level since July 2023, when the Fed last hiked and took the range to its highest level in more than two decades. The rate-setting Federal Open Market Committee (FOMC) also voted to ease the pace at which it is reducing bond holdings on the central bank’s balance sheet, which could be viewed as an incremental loosening of monetary policy.
Lack of Progress on Inflation
The FOMC noted a “lack of further progress” in getting inflation back down to its 2% target, stating that it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.” The statement also altered its characterization of the risks to the Fed’s dual mandate of stable prices and full employment, saying the risks “have moved toward better balance over the past year.”
Economic Outlook
The economic outlook presented in the statement was mixed. While it characterized economic growth as moving at “a solid pace,” amid “strong” job gains and “low” unemployment, Fed Chair Jerome Powell acknowledged that “inflation is still too high” and that “further progress in bringing it down is not assured and the path forward is uncertain”.
Balance Sheet Reduction
Regarding its balance sheet, the Fed said that beginning in June, it will slow the pace at which it is allowing maturing bond proceeds to roll off without reinvesting them. The monthly cap on Treasuries will be reduced from $60 billion to $25 billion, putting the annual reduction in holdings at $300 billion, compared with $720 billion from when the program began in June 2022.
Crypto Market Overview
Implied and Realized Volatility
Realized volatility (RV) for Bitcoin (BTC) began to increase as we approached the FOMC meeting on Wednesday, and continued its upward trajectory to finish the week in the high 60’s along with Ethereum (ETH). Crypto markets reacted positively to the Fed’s rate decision with altcoins leading the rally. Implied volatility for both assets has fallen to the mid 40s as traders reposition themselves post-halving.
The response to macro data this week shouldn’t be surprising as crypto-specific narratives like the Bitcoin halving and the spot ETF are all in the rearview and with Ethereum’s spot ETF delayed macro factors may start to become more relevant in crypto volatility.
Term Structure and Skew
Term structure for both BTC and ETH are in contango and both curves have shifted lower from a week ago. This is typical after a macro event like the FOMC rate decision as hedging activity going into the event pushes up implied vol across the curve leading to ‘normalization’ once the event has passed. However, with that being said it is still surprising to see a substantial decrease in volatility in the back-end of the curve. Without a crypto-specific narrative for markets to price in, traders have begun selling longer dated options to capture the richer premium of those options.
Skew data shows no clear preference for calls or puts in short dated expiries but a bias towards calls in the longer dated maturities. This is in stark contrast to last week where put buying dominated short-dated options as traders anticipated further market declines.
Options Flows and Positioning
In recent trading, option flows have been quite mixed. There was a notable 15% decrease in Bitcoin volumes, with significant put buying observed at the $58,000 and $59,000 USD strike prices, while calls at higher strike prices in longer-dated options (September and December expires) were being sold to capture premium. Ethereum experienced something similar, with a decrease in volume by approximately 30%, with notable trades including put buying in the lower strike ranges of $2,700 to $2,900 USD, as traders still anticipate further declines.
Bitcoin gamma positioning is shifting towards neutral post halving, particularly now that the market has surpassed the $60,000 USD strike. In contrast, Ethereum’s market makers remain long gamma as gamma sellers return, but could switch to short if the market trades down to the $2,900 range again.
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Disclaimer: This article is not intended to provide investment, legal, accounting, tax or any other advice and should not be relied on in that or any other regard. The information contained herein is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of cryptocurrencies or otherwise.
