Strong Dollar Pummels Risk Assets

Global markets opened risk-off at the open of Sunday night futures trading, and sold off further into the morning as volatility jumped, and the dollar approached multi-decade highs.

Risk Reverses as Dollar Strengthens

Today’s issue will cover legacy market dynamics and evaluate the current state of the “liquidity tide.” Readers are familiar with bitcoin and equity markets trading in tandem, we cover the relationship closely. 

We also closely follow the volatility dynamics across asset classes, as the levels of historical and implied volatility in an asset class are very helpful for evaluating relative risk. 

Before diving in, let’s revisit our current thesis on the state of global risk markets:

A large slowdown is amidst throughout the global economy, as short-sighted energy policy has worked to keep inflationary pressures elevated. Although equities and risk broadly have felt relief since the middle of June, we were and are of the belief that this is a bear market rally with further pain to be felt across risk.

Previous Issues: 

July 20th - Caution: Bear Market Rallies

Aug 12th - Rising Speculation - Evaluating The Explosion In Derivatives Interest 

Global markets opened risk-off at the open of Sunday night futures trading, and sold off further into the morning as volatility jumped, and the dollar (as seen by the DXY) approached multi-decade highs once again. 

A trap was indeed set last week for global risk markets, as a divergence between declining implied risk (VIX), a strengthening dollar, and complacent equities was the perfect storm for an imminent reversal. 

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Dylan LeClair 🟠 @DylanLeClair_

lets just pile into eth because of a narrative and pretend its not all the same trade with a higher beta shall we? /s

The VIX, which represents the market's expectation for front-month volatility for the S&P 500 index, is notably smaller than the implied volatility in bitcoin options markets, by an approximate factor of three.

Shown below is the 1-month forward implied volatility for bitcoin, which can be thought of as similar to the VIX. Whereas equities are currently trading with a 24% expected volatility for the next month (as expressed by VIX at 24), the options market for bitcoin implies 71% volatility for 1-month contracts.