The Macro Pulse | Crypto Option Insights: Navigating Macro Regime Change and China Interventions

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July 26, 2023



Low vol and range bound markets have been dampened by China interventions. Yet macro regime change is upon us and option traders are positioning for it.

- Accelerated contraction ahead in the US
- China interventions. Maintaining the veil of stability
- Volatility is bleeding lower, but flows continue bullish
- Central Banks in the spotlight. Regime change beckons

Slowing Down

A relatively quiet week on the macro front ahead of the upcoming Fed but softer retail sales, weak industrial production set against better jobless claims highlights this bifurcated economy.

Labor market resilience in the face of an economic slowdown. Yet we know the labor market is the most lagging of indicators. Do the Fed?

The Conference Board’s Lead Economic Indicators meanwhile showed an accelerating contraction which increasingly points to recession, printing the lowest reading since July 2020 and the 15th consecutive monthly decline.

Recession or no, US economic activity is set to decline sharply in the months ahead. The US economic surprise index is starting to roll over. Rates are not priced for the coming slowdown. 🧐

China Intervention

BTC/CNHT - China intervention Vs US Dollar, but are they intervening in BTC?

Meanwhile, China’s economy lost significant steam in Q2, with QoQ growth of just 0.8%, down from 2.2% and taking the low base yearly comparison to just 6.3% against expectations of 7.3%.

Perhaps an even bigger concern as it relates to social unrest, youth unemployment is now at a record 21.3%.

Underpinning the slowdown is a deepening property crisis, underscored by China’s Evergrande reporting a $81bn loss for the last two years.

A failing property sector, dissatisfied youth, expectations of mooar liquidity. Got BTC?

With the currency under pressure and complicating efforts to ease, Chinese State Banks were seen selling USDCNH as it appears a line has been drawn under the extent of acceptable currency weakness. ✍️

Speculation also that China has been “sitting” on BTC to maintain the veil of stability and warn off potential capital flight. 🤔

It certainly feels like there’s a “flow” out there which leans into any attempt for BTC to break higher.

Vol Bleed

DVOL grinding lower

With spot trading in an uninspiring range, vols continue to drift lower.

Flows however continue to be bullish on Paradigm, with upside BTC positions being rolled further out and fresh upside positions initiated. 💪

840x BTC of 29 Dec 34k/45k Call Spreads bought, to give a flavor of the target ranges.

25d skew also continues to trade elevated for Calls over Puts. No signs of bearish fear in the vol markets.

ETH flows a little more mixed and once again takes a back seat as the “Ripple effect” fades. 😞

Fed up

Little then to really excite and break us out of this range bound lethargy. Markets are feeling a little frustrated.

A big week of Central Banks ahead however, with the Fed, ECB and BoJ all starring. 💥
The ECB will be interesting as European data has declined sharply and with producer prices in deflation territory, inflation looks set to follow quickly lower.

ECB hawks have also started to soften the language. Another major central bank “pivot” appears imminent. 👀

The Fed, expected to deliver on a 25bp hike, will want to keep optionality on the table for more hikes this week, which may initially disappoint bulls.

Yet with the economic data slowing and inflation falling, this hike cycle looks done. 👊

We’re in the midst of macro purgatory, as the end of the hike cycle and changing macro regime is unable to yet, be fully embraced.

Yet the peak inflation, peak rates narrative continues to build. Crypto Option traders are positioning for the new world.

David Brickell 💜

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