Macro Regime Tracker: Global Carry Trade Unwind
Macro regime and risk assets qualified clearly
Macro Regime Tracker:
The Macro Regime Tracker offers a daily lens on how shifts in growth, inflation, and liquidity affect short-term risk and reward. Leveraging machine learning and cross-asset data, it identifies macro changes and their impact on market positioning.
The launch video for the Macro Regime Tracker is here: Link
Macro Regime Tracker Index:
Macro Regime Context
Macro Tear Sheets: Equities, Fixed Income, FX, Crypto, and Commodities
Macro Regime Dashboard: Excel spreadsheet for economic data and interest rates
Growth and Inflation Regime Tracker
Fixed Income and Credit Model
Equity Sector Model
Machine Learning Strategies and Models
Macro Regime Context:
Before we jump into the macro regime tracker, we need to address the global carry trade and its risk to financial markets, especially to Bitcoin.
Main Idea: The global carry trade involves borrowing in low-interest-rate currencies (like the yen or euro) and investing in higher-yielding dollar-denominated assets to capture the interest rate differential. This creates persistent demand for the U.S. dollar, reinforcing its reserve currency status and deepening global dependence on dollar liquidity. Because dollar assets are the end-point of this capital flow, risk assets like Bitcoin benefit during periods of ample dollar liquidity and suffer when the dollar strengthens or funding tightens. As long as the dollar remains the global funding and settlement currency, Bitcoin’s valuation will be structurally tied to global dollar flows and the dynamics of the carry trade.
Notice how the carry trade led Bitcoin to the upside and downside in the price action over the last year. The index has rallied a bit more than usual and diverged marginally from Bitcoin (partially due to the Eurozone) but if the dollar liquidity positioning unwinds, this creates considerable downside for risk assets.
Let me explain this a little more: Over the last 5 years, popular media narratives have been focused on the Fed “printing money” because of all of the inflation in the underlying economy. What they refuse to remember is that the Fed has conducted QE many times without causing CPI to rise. No one cares to question this narrative because things like Bitcoin continue to melt up as “undeniable confirmation” of the idea that the Fed “prints money.” Well, this mistake is now going to begin confounding people over the next 12 months until they realize what has actually happened.
The Fed and Treasury have intentionally and strategically disconnected interest rates from the quantity of money in the system. When you have the Fed increase reserves and the Treasury issuance a ton of bills, this creates a significant liquidity impulse in financial markets and forces capital to move out the risk curve into things like Bitcoin. (Chart: White is bank reserves, blue is total bills outstanding, and orange is BTC).
The carry trade thrives in this environment because when the Fed decouples rates from money supply and floods the system with reserves while the Treasury issues short-term bills, it creates a liquidity surplus that incentivizes leveraged capital to chase yield further out the risk curve—fueling flows into dollar-denominated assets like Bitcoin.
But how can we get a clear view of how the quantity of money in the system is impacting the amount of dollar liquidity? One of the ways is looking at cross currency basis swaps, which have moved almost perfectly with assets like Bitcoin. The chart below shows Euro cross currency basis swaps (1y, 10y and 30y) overlayed with BTC. The simple idea is that when these instruments move UP, there is a marginal increase in dollar liquidity.
This is THE reason that the DXY rallied with Bitcoin last year. This move was primarily driven by monetary policy differentials as opposed to a shortage of dollars in the system.
Now, there is a lot more that goes into this, especially for taking active views on Bitcoin, but what we know for sure right now is that there is risk to the carry trade that could put downward pressure on Bitcoin, AND positioning is showing significant complacency (see the last report where I covered this: link). Implied vol discounts in things like MSTR and COIN show extreme complacency in positioning.
More on this at the end of the tracker.
Additionally, the Trade write up on bonds and credit has not changed. The views continue to be confirmed. This will play into today’s analysis.
Trade Write-Ups: Bonds and Credit Trades
This trade write-up will break down the updates that took place during FOMC today and explain the risk-reward for running trades in equities, bonds, and credit.
Main Developments In Macro On Friday:
Fed’s Daly Still Sees Two Interest Rate Cuts This Year: Rtrs (1)
*TRUMP REITERATES APRIL 2 WILL BE `LIBERATION DAY'
*SPAIN PRELIM MARCH HARMONIZED CPI RISES 2.2% Y/Y; EST. +2.5%
*FRANCE PRELIM MARCH HARMONIZED CPI RISES 0.9% Y/Y; EST. +1.1%
*ONE BOJ MEMBER: DOWNSIDE RISKS FROM THE US ARE RISING RAPIDLY
Macro Tear Sheets: Equities, Fixed Income, FX, Crypto, and Commodities
Macro Regime Dashboard: Excel spreadsheet for economic data and interest rates
Growth and Inflation Regime Tracker:
The Macro Regime Model first provides a real-time view of growth and inflation dynamics, then directly connects these insights to upcoming catalysts and the statistical measures that gauge their impact on asset prices.
(If you are new and would like to do a free trial to review the full macro regime tracker with the connected ES strategy, a link to a free trial is available here: Link).
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