A recent report from the Chicago Fed highlights the easiest financial conditions in the U.S. since November 2021.
The National Financial Conditions Index (NFCI), which tracks financial health across various sectors, offers a snapshot of liquidity, credit availability, and market risk. The NFCI uses a simple structure: negative values indicate looser-than-average financial conditions, while positive values suggest tighter conditions, making capital harder to access.
Looser Financial Conditions and Their Impact on Markets
For the week ending September 13, the NFCI registered -0.56, indicating even looser conditions than the previous week. This represents the most relaxed financial environment since November 2021—around the same time bitcoin (BTC) hit its cycle high of $69,000.
Financial analyst Fejau, host of the Forward Guidance Podcast, recently shared insights on the correlation between looser financial conditions and bitcoin’s performance. According to Fejau, when financial conditions ease, speculative assets like bitcoin often rally. In fact, this trend has been observed across several market cycles.
Historical Correlation Between Bitcoin and Looser Financial Conditions
In 2013, during a period of easing financial conditions, bitcoin surged from $100 in July to over $1,000 by November. The NFCI had dipped to -0.80 at that time, indicating significantly looser financial conditions. Similarly, in late 2017, as financial conditions eased, bitcoin rocketed from $2,000 to $20,000 in just six months.
The COVID-19 pandemic, however, marked a period of tight financial conditions, leading to a crash in both traditional and speculative assets, including bitcoin. As the global financial environment tightened, access to capital became restricted, affecting riskier investments.
Recent Easing Boosts Bitcoin Again
Over the past twelve months, financial conditions have steadily loosened, contributing to bitcoin’s surge from $25,000 to over $73,000 by March 2024. Interestingly, this rally occurred before central banks began cutting interest rates, further emphasizing the positive relationship between looser financial conditions and risk-on assets like bitcoin.
DXY Index: A Key Factor to Watch
While financial conditions are crucial, other factors like the DXY Index, which measures the strength of the U.S. dollar, also play a role. A rising DXY can negatively impact bitcoin, as a stronger dollar makes speculative assets less attractive. However, with financial conditions continuing to ease, the outlook for bitcoin remains optimistic, provided other economic variables remain supportive.
