Offshore USD Liquidity Crisis Eases, Driving Up BTC Price

During the last 2 days, we have seen a series of central bank actions from all over the world, which include liquidity support for money market funds in the US, ECB’s 750 billion Euros Pandemic Emergency Purchase Program which allows the purchase of European investment grade corporate bonds rumored to total around a $1.2 trillion fiscal package, and ultimately the extension of the Fed USD swap line to other central banks.

We believe among them, the extension of the USD swap line to central banks of the Australia, New Zealand, Brazil, Denmark, South Korea, Mexico, Norway, Singapore and Sweden is the one of the most significant events for all risky assets including Bitcoin. These new facilities will support the provision of U.S. dollar liquidity in amounts up to $60 billion each for the Reserve Bank of Australia, the Banco Central do Brasil, the Bank of Korea, the Banco de Mexico, the Monetary Authority of Singapore, and the Sveriges Riksbank and $30 billion each for the Danmarks Nationalbank, the Norges Bank, and the Reserve Bank of New Zealand. These U.S. dollar liquidity arrangements will be in place for at least six months.

As Fed indicates in its Q&A, providing swap lines to a wide range of foreign economies helps the U.S. economy and financial system in several ways:

• It helps maintain the flow of lending to U.S. households and businesses by reducing the likelihood that distress in foreign financial markets and economies would weigh on global banks that are active in U.S. markets.

• It reduces the likelihood that financial crises could emerge and spread – such crises could disrupt global financial markets and spillover over to harm U.S. markets and economic activity.

• By reducing financial stress, it reduces the likelihood that turbulence and crises that would drive up the dollar and curb foreign growth, thus hurting our exports and widening our trade deficit.

• As we have previously said, it is in fact the liquidity crunch which drives down all asset prices. Everything is sold in the exchange of USD. If the market thinks the USD liquidity issue is to be resolved, asset prices will go up including Bitcoin. The Fed literally copied its homework in 2008, implying that it believes we are in 2008 mode now. The markets appreciate this kind of mindset, and rebounded sharply in response.

Results: US equities rebounded, Bitcoin rebounded, and even the high yield bond market rebounded as well. With high yield markets all up, investors were also chasing AT1 and longer duration Investment Grade bonds. Investors are chasing low cash price high yield, with high beta names trading up by 15-20% easily.

Another persistent rumor is that Trump might step in to help resolve the oil price war. In fact if the price war could be stopped, it could benefit all of the three countries, the US, Russia and Saudi Arabia. If The oil price recovers, petroleum dollars will not be forced to dump assets as before.

While the market is cheering the rapid rebound of Bitcoin, it it’s worth bearing in mind the Mt Gox Day is around the corner on March 31.