CPI

The last macro hurdle in the form of CPI is out of the way. All eyes are on the ETH merge now, happening in a couple of hours.

On CPI, we wrote in our last macro post that month-to-month economic data releases have an element of statistical noise, which can drive very volatile near-term moves, like the sell-off we saw post-CPI. BTC dipped from 22.8k high to 19.8k while ETH dropped from 1,760 to 1,570.

While the inflation trend has no doubt peaked and is headed lower, it will be a long and windy road down month-to-month as the market pendulum over-swings on either side. Following last night's move, and the market starting to price in 100bp hike for Sep, we think it is again moving towards being overdone on the bearish side again, with the Sep FOMC likely to stick to 75bp. The market is pricing 75% probability of a 75 bps hike, and 25% probability of a 100 bps hike.

ETH Merge

On the ETH merge later today, we do not expect any fireworks on the POS side, so the event itself will likely be a vol killer. ETH vols remain elevated above 100 vols across the curve, as market makers refrain from getting shorter into the merge, but the decay from the longs looks unsustainable against the realized.

The ETH POW is the main wildcard - and where a large chunk of the near-term ETH trades are based upon.

Most of the risk-neutral ETH trades in the derivatives market (shorting calls, futures, forwards) were put on to profit from the potential "free ETHW airdrop" from holding ETH spot. However, market finally came to terms with ETHW as a potential massive disappointment last week, following their “totally” white paper release (9 pages of “this page is intentionally left blank”), coupled with their chain ID debacle, meaning nobody will be able to actually test the chain pre-fork.

This led to people unwinding the other large market-neutral bullish fork trade of long ETH/BTC - which saw the biggest 5-day rate-of-change decline since the bottom on 13 June (Chart below).

We anticipate a lot of the volatility will likely come from the unwinding of these trades – just like last Friday where we got a sense of the violence of these highly levered market-neutral unwinds.

Implied pricing for a potential ETHW is single digit on ETH futures markets now to roughly $30 on the Poloniex spot market - although we caution against reading too much into the extremely illiquid spot market there.

We have taken back some of our risk ahead of the September Triple Combo – CPI, Merge and the FOMC. Currently we are net long Vega and Gamma – across the curve in BTC against shorts loaded on the ETH front-end. Longer-term the ETH POS should be bullish, but we are not expecting an immediate breakout move post-merge. We are anticipating a huge pressure on the ETH vols post-merge.