These 2 Forces Could Reignite the Rally

Dear Subscriber,

Investors are feeling the weight of the fear, uncertainty and doubt that has permeated the crypto market.

It’s easy to understand why.

With the flurry of negative headlines — covering everything from the launch of DeepSeek shaking the AI and crypto markets to tariff troubles and rising inflation — it can be hard to remain objective.

That’s why I’m glad we can get through this market pause together.

Because with my Crypto Timing Model …

And my thorough analysis of the cycles and their history …

I can see this turbulence is likely nothing more than a rough patch.

I showed you last week why the cycles say the search for the cycle top is still on.

Today, I’ll reveal two macroeconomic forces that could push the rally to resume.

Let’s dive in with …

Chart 1: Fed’s Reverse Repo Facility (RRP)

Swollen by relentless money printing during the Covid years, the Reverse Repo Facility acts like a checking account for financial institutions at the Federal Reserve.

When the graph ascends, it indicates liquidity being drawn from the financial system into the Fed. Conversely, a descending line means liquidity is being released.

As you can see, the RRP has been on the decline since about December 2022. From a peak of $2.4 trillion, right down to where it sits today, at just under $100 billion.

Remember, a falling RRP means the Fed is injecting new dollars into the financial system. This is one of several backdoor channels Fed officials have used since to quietly backtrack on their promise to sharply reduce inflation.

They talk tough in public about how they fight inflation by making money and credit less easily available.

But in private, they turn to arcane methods few people have ever heard of — and even fewer understand — to do the exact opposite.

That is, inject large volumes of fresh money into the financial system. (The technical term for this is sterilization.)

But now, the RRP is essentially depleted. And no longer useful to the Fed as a “back door” for money printing.

This brings me to the second key chart to watch, going forward:

Chart 2: Price of 1 U.S. Dollar in Chinese Yuan

Observe the two horizontal red lines at 7.30 and 7.35. They define the danger zone that seems to keep Beijing up at night.

For better or worse, the Chinese Communist Party bosses do not want the yuan to weaken — that is, move materially above this level.

Much of their fear, in my opinion, has to do with inflation.

As an energy importer, a weak yuan will likely cause energy costs across China to rise. Which could easily lead to inflation much like what swept across the EU following Russia’s invasion of Ukraine.

Sharply rising consumer prices — coupled with the real estate crisis that has already hammered Chinese households — is a reliable recipe for massive social unrest.

Furthermore, Beijing has a grand ambition for the yuan to compete with — or even replace the U.S. dollar — on world capital markets. This, however, requires a strong currency, not a weak one.

How These 2 Charts Can Chart the Course of Crypto

After declaring war on inflation, Fed officials have been sucking dollars out of the financial system via their bond-selling program. But since late 2022, they have simultaneously used the RRF to quietly inject money back into the financial system.

This “sterilization” gave the Chinese room to print money like crazy — without threatening the CNY/USD exchange rate.

So, they did. Big time.

The resulting surge in global liquidity ignited the crypto bull we’ve been riding since.

However, that changed in the fourth quarter of last year. As the RRF ran down, the Fed lost its covert mechanism to replace dollars being sucked out of the system by its ostensible war on inflation.

This turned the world’s No. 1 central bank into a net drag on global liquidity.

Beyond a brief burst of initial enthusiasm, President Trump’s election and then inauguration did nothing to materially change the liquidity situation.

That’s because the market thinks his policies will be mostly bullish for the dollar.

A strong dollar restrains the flow of money across the globe. And it leaves other central banks — particularly China — unable to ease monetary conditions without risking rising inflation and a falling currency.

Happily, there are signs that liquidity may already be turning up.

For example, the Federal Reserve is already laying out plans to halt quantitative tightening by June. This will boost dollar liquidity.

And when that happens, it’s usually go-time for crypto assets.

The bull market should resume, after this soft patch is worked out.

Until then, we can expect this choppy, sideways market to continue until it finds a bottom.

Fortunately, we’ve already taken profits and de-risked our portfolios to minimize the impact of this rough patch on our investments.

And it means you should have some powder dry and ready to redeploy when the time is right.

Hold tight until then!

Best,

Juan Villaverde