US Plans Ultimatum in Mexico Energy Dispute, Raising Threat of Tariffs

Political

Summary:

The Biden administration plans to send Mexico an "act now or else" message in coming weeks in an attempt to break a stalemate in an energy trade dispute as bipartisan calls grow for the U.S. to get tougher with its southern neighbor, according to people familiar with the discussions.

The move would represent a significant escalation in already-strained tensions between U.S. President Joe Biden and his Mexican counterpart, Andres Manuel Lopez Obrador.

Obrador's decision to roll back reforms aimed at opening Mexico's power and oil markets to outside competitors sparked the trade dispute.

The Office of the United States Trade Representative (USTR) is expected to make what was described as a "final offer" to Mexico negotiators to open its markets and agree to some increased oversight, three people familiar with the talks told Reuters. If not, the U.S. will request an independent dispute settlement panel under the Unites States Mexico Canada Agreement, or USMCA, they said.

The United States and Canada demanded dispute settlement talks with Mexico in July, 250 days ago. Under USMCA rules, after 75 days without a resolution they were free to request a dispute settlement panel, a third party that rules on the case.

At an event on Monday, Mexico's Economy Minister Raquel Buenrostro said the United States has been entitled to call for a panel since Oct. 3.

If the panel rules against Mexico and it fails to take corrective action, Washington and Ottawa could ultimately impose billions of dollars in retaliatory tariffs on Mexican goods.

The White House has hoped to avoid escalating trade tensions with Mexico as it sought help on immigration and drug trafficking. But months of talks have yielded little progress and the administration has run out of less-combative options, the sources told Reuters.

Raising the stakes in the dispute carries significant risk for Biden, who is expected to launch a re-election bid in coming weeks and will face Republican criticism over his handling of immigration and drug trafficking. Biden needs Mexican help to control the border after COVID-era restrictions are lifted on May 11.

A U.S. official acknowledged growing frustration with the lack of progress in the discussions. "We want to see clear progress on this issue and address the concerns that have been raised by our negotiating teams," said the official, who declined to be named because the discussions were private.

A USTR spokesperson declined comment on the energy consultations with Mexico, but Trade Representative Katherine Tai hinted at possible escalation during a Senate Finance Committee hearing on Thursday when questioned about the talks.

"We are engaging with Mexico on specific and concrete steps that Mexico must take to address the concerns set out in our consultations request. This is still very much a live issue," Tai said.

She later added: "We know that all the tools in the USMCA are there for a reason."

U.S. oil companies, such as Chevron and Marathon Petroleum, along with solar and wind power companies, have struggled to get permits to operate in Mexico in recent years.

Mexico's Buenrostro said the challenges of transitioning to renewable energy and getting those projects connected to the power grid were at the bottom of the issue.

"It is not that they are being given discriminatory treatment, it is that we have difficulties of a technical nature," Buenrostro said, adding investments in power distribution were being made to address the issues.

The potential move by the Biden administration comes just weeks after USTR escalated another trade dispute with Mexico over its plans to ban genetically modified corn for human consumption, requesting formal consultations. The energy dispute is a step ahead under the USMCA's enforcement mechanism.

The Biden administration alleges Obrador is favoring state oil company Petroleos Mexicanos (Pemex) and national power utility Comision Federal de Electricidad (CFE), and discriminating against U.S. companies.

"I think you're going to increasingly see folks looking for ... the next step of establishing a panel relatively soon," a congressional aide said, noting patience on Capitol Hill over the talks was wearing thin.

Ron Wyden, a Democrat senator from Oregon and chair of the Senate Finance Committee, told Tai on Thursday that Mexico was "flouting" its USMCA obligations by shutting out U.S. renewable energy firms.

"Eight months have passed. American clean energy producers are still waiting for access. In my view, it's long past time to say enough is enough and escalate this into a real dispute settlement case," Wyden said.

U.S. imports from Mexico totaled $455 billion in 2022 against exports of over $324 billion, for a record U.S. trade deficit of $130.5 billion, according to government data.

Source: Reuters

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Samantha Luan

Forex

USD: Fed rate expectations keep bouncing around

Risk sentiment recovered yesterday as markets appeared calmer about the health of European lenders which had generated a sell-off on Friday. The narrative that banking turmoil was shifting back from the US to Europe was the key driver of a dollar rebound at the end of last week, and we are not surprised to see investors' tentative optimism at the start of this week coincide with USD weakness.

The key reason is that, when stripping out the risks of financial contagion in Europe, monetary policy still seems to be heading in two different directions in Europe and the US. We'll expand on ECB and Bank of England comments in the EUR and GBP sections below, but we can definitely see how European central bankers are more comfortable than their US counterparts when pushing ahead with a hawkish narrative. A case in point: Neel Kashkari – one of the FOMC's biggest hawks – warned about the economic impact of a credit crunch and implicitly suggested less need for tightening.

Since the Fed is not offering a hawkish narrative to lean on, market pricing of future rate moves remains strictly tied to news on financial stability. Consequently, Fed rate expectations have become an accurate measure of market sentiment about the banking turmoil. Since the end of last week, markets have priced out a rate cut in July (pushed it to September), and now expect 60bp of easing by year-end as opposed to almost 90bp. That is probably due to the beneficial effect of First Citizens acquiring Silicon Valley Bank over the weekend.

Today, the US data calendar includes the Conference Board consumer confidence figures for March, the Richmond Fed manufacturing index (also for March) and February's wholesale inventories. Fed Vice Chair for Supervision Michael Barr will testify before the Senate Banking Committee.

In FX, we think that as long as fears of banking contagion remain relatively quiet in Europe, the balance of risks for the dollar should remain tilted to the downside. We could see markets once again favour JPY for tactical defensive positions.

EUR: Schnabel keeps hawkish tone going

Isabel Schnabel reinforced her profile as one of the most hawkish members of the ECB governing council yesterday, as she said she wanted the ECB March statement to include a reference that more hiking was possible. Her comments likely helped push market rate expectations in the eurozone a little further: 46bp of tightening is now priced in by September.

Today, we'll hear from other ECB members. President Christine Lagarde will speak at a BIS event this afternoon, where Joachim Nagel and Francois Villeroy will also participate. We'll also hear from Madis Muller, Bostjan Vasle, Gabriel Makhlouf and Pablo Hernandez De Cos. On the data side, the German Ifo index came on the strong side yesterday (at 93.3 from 91.1 in February), but the calendar does not include market-moving releases today.

We think EUR/USD can retain some bullish momentum on the back of the ECB's hawkish narrative and calmer investor nerves on the European banking situation. Our view remains that 1.10 can be reached quite soon, although bumps along the way are highly likely.

GBP: Bailey helping the pound

Bank of England Governor Andrew Bailey sounded relatively hawkish in his remarks yesterday. While saying that rates should not be taken to the 2008 peak, he stressed how the UK banking system is in a sound position and that inflation remains the key focus, and that further rate hikes are possible if inflationary pressures persist. Bailey will testify today about the SVB collapse and we may hear some details about the Bank's macroprudential measures.

With BoE rate expectations now supported, we think GBP/USD can head towards the key 1.2426 (December high) and 1.2500 resistances on the back of USD weakness and policy divergence relatively soon.

HUF: NBH to confirm hawkish tone

The National Bank of Hungary (NBH) is meeting today for the first time since the start of the recent turbulence in global financial markets. We expect rates to remain unchanged, in line with market surveys, and a hawkish tone. Although we have already seen the peak in inflation and an improvement in the current account deficit, the forint's return to the 400 EUR/HUF level again will not allow the NBH any hints of dovish signals, in our view. The meeting will also bring an updated central bank forecast, however, we are unlikely to see any game-changer today.

On the FX side, the Hungarian forint has maintained the highest beta against the global story, which, assuming favourable global conditions, creates room for a significant recovery. We believe the recent sell-off has cleared the very heavy long positioning that previously blocked further forint appreciation. The renewed rally is also supported by the energy story with the gas price testing new lows. Moreover, with the forint having by far the highest carry within the Central and Eastern Europe region, it will once again attract investors to the HUF market. Thus, in our view, today's hawkish meeting should support the new gains and push the forint below 385 EUR/HUF.

Source: ING

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Kevin Du

Cryptocurrency

What can you do with a volatile and speculative asset class that has no proven end-use but refuses to do the polite thing and die?

Buy it, maybe?

Even Bitcoin's biggest sceptics may be throwing up their hands in surrender as the crypto bellwether soaks up everything the last turbulent year could throw at it, and starts climbing once again.

Those who thought — or hoped — it would be wiped out by a turbulent 2022 look set to be disappointed, again.

If a peak-to-trough crash from $68,000 to $16,000 can't kill it off, then what can, exactly?

Incredibly, Bitcoin is now 2023's best-performing asset class, up 67.59 per cent year-to-date and trading at a nine-month high of around $28,000 at the time of writing.

It might be time to admit defeat and accept that Bitcoin, Ethereum, Dogecoin and the rest are here to stay, like it or not.

Bitcoin is still dirty, polluting, volatile and not much use, unless you're a scammer, gangster or trafficker.

It is also a money destruction machine for naive traders who reckon they can get rich overnight, only to waste their lives glued to an app that destroys their wealth before their delusions.

Last year destroyed the claim that Bitcoin was digital gold, a safe haven in times of economic trouble.

It sold off last year along with tech stocks, bonds, real estate, emerging markets and other key asset classes. The end of the cheap money era, as inflation and interest rates rocketed, was always going to hurt more speculative assets like this one.

It couldn't kill it, though.

As they say, hope springs eternal and Bitcoin is swinging back into favour as investors look forward to the US Federal Reserve's "pivot", when it signals that the war on inflation is won and it will start cutting interest rates rather than hiking them.

Trading platform eToro has just seen a 78 per cent jump in newly opened Bitcoin positions over the past month, as investors wake up to the opportunity, says the site's crypto analyst Simon Peters.

"Although inflation remains sticky, the headline numbers are coming down. As a result, we're seeing the opposite of what we saw in 2022 and the pressure is easing off crypto."

Now, the collapse of Silicon Valley Bank in the US and the takeover of Credit Suisse in Switzerland have given it another lift.

Crypto was a child of the 2007-2008 global financial crisis, appearing shortly after the world's central bankers started to debase fiat currencies by printing trillions of virtual money through quantitative easing.

But it could come of age in the latest banking meltdown, as traders calculate the Fed and others will be forced to cut interest rates and deliver more QE to prevent systemic meltdown.

Loose monetary policy is good for crypto, says Vijay Valecha, chief market analyst at Century Financial.

"When the Fed tightens, Bitcoin tends to fall. If it eases, then crypto could rise."

Gabriella Kusz, chief executive of the Global Digital Asset and Cryptocurrency Association, says investors are moving towards Bitcoin and other forms of crypto "as a reflection of their potential value as a hedge and alternative store of value during such times".

Lower interest rates will boost all zero-yielding assets, including Bitcoin, gold, silver and US stocks, as investors will get a poorer return on cash and bonds, says Fawad Razaqzada, market analyst at City Index and Forex.com.

The gold price is menacing $2,000 an ounce again after jumping almost 10 per cent in a month, while silver and tech stocks are also up.

Mr Razaqzada says Bitcoin has faced resistance around the $28,000 mark but the Fed's "dovish rate hike" of just 0.25 per cent at last week's meeting helped push it over the threshold.

"Investors are starting to price in interest rate cuts for later this year or early 2024," Mr Razaqzada says.

Falling interest rate expectations have also hit the US dollar, giving Bitcoin a further boost because it is priced in dollars, and this makes it cheaper for buyers in other currencies.

Crypto investors are renowned for their short memories and many will have forgotten that as recently as February, this sector was in crisis.

It has suffered a string of crashes over the past year, starting with the supposedly stablecoin Luna in May, which was swiftly followed by Singapore-based crypto hedge fund Three Arrows Capital in June, platforms Celsius Network and Voyager in July, and Bitfront and BlockFi in November.

Losses topped $2 trillion and some thought Sam Bankman-Fried's FTX scandal might be the final nail in the crypto coffin, but it has risen from the dead yet again.

Calls for effective regulation are growing louder, particularly in Europe and the UK, says Nils Bulling, head of strategic innovation at digital bank Avaloq.

Some fear regulation will sink crypto, but he reckons it will boost the sector rather than sink it.

"Investors still seem interested in crypto assets and currencies. This should be even more true if the investment partners are trustworthy and subject to meaningful regulation," Mr Bulling says.

Bitcoin is what it has always been, a high-risk play on volatility. Yet the longer it survives, the harder it is to ignore.

In fact, its lack of correlation with other asset classes — or anything, really — may ultimately turn out to be its strength.

Despite its failings, there is a growing argument for having some exposure in a balanced portfolio.

If tempted, the old rules apply, so diversify by investing the majority of your invested wealth in traditional asset classes, such as shares, bonds, gold, property, commodities and cash.

Resist short-term profit grabbing, overtrading, impulse buying (and selling), extreme hype, crazy forecasters and ever-present crypto scammers. Never borrow money to buy it and never, ever invest what you cannot afford to lose.

If you can do all that, you might find an acceptable role for Bitcoin, even if you don't understand or like it.

Source: The National News

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Devin

Forex

Forex markets are currently navigating a landscape of uncertainty, as mixed currency performance contributes to a lack of clear direction. Dollar has experienced a decline in Asian session, but still hovers within familiar boundaries against other major currencies. Meanwhile, Euro has managed to strengthen against the greenback but appears less robust in other pairs.

Yen, on the other hand, has emerged as a strong contender for the day, recouping some of its yesterday's pullback. In addition, Sterling has found firmer footing after BoE Governor Andrew Bailey's remarks indicated that the Monetary Policy Committee can concentrate on inflation while the Financial Policy Committee maintains financial stability. Interestingly, Australian Dollar has managed to hold its ground despite disappointing retail sales data.

Looking ahead, the market may experience subdued trading due to a relatively light economic calendar. However, the upcoming release of US consumer confidence data could introduce an element of volatility, as traders and investors alike look for potential opportunities in the midst of uncertainty.

Technically, GBP/USD could now be eyeing 1.2342 temporary top with this week's rebound. Break there will resume the near term rally to 1.2445/6 resistance zone. Decisive break there will resume larger up trend from 1.0351 (2022 low) to 1.2759 fibonacci level. Let's see if the Pound has enough buying to back the breakout. Forex Markets Grapple with Uncertainty and Ambiguity, Sterling Ready for Breakout?_1

Forex Markets Grapple with Uncertainty and Ambiguity, Sterling Ready for Breakout?_1

In Asia, at the time of writing, Nikkei is up 0.15%. Hong Kong HSI is up 1.37%. China Shanghai SSE is up 0.18%. Singapore Strait Times is up 0.73%. Japan 10-year JGB yield is up 0.0220 at 0.317. Overnight DOW rose 0.60%. S&P 500 rose 0.16%. NASDAQ dropped -0.47%. 10-year yield rose 0.148 to 3.528.

Fed Jefferson on balancing inflation and economic stability

Fed Philip Jefferson stated yesterday that the current inflation rate is too high, emphasizing the FOMC's goal to reduce it to 2% as quickly as possible. Speaking at Washington and Lee University in Lexington, Virginia, he acknowledged that the process may take some time due to persistent inflation components such as services excluding housing.

Jefferson said, "I would like to say that inflation will return to 2% soon, but we have to do it in a way that does not damage the economy any more than is necessary. That's what we are trying to do." Fed is grappling with the challenge of ensuring price stability amid high inflation while also maintaining financial stability in the wake of the second-largest bank failure in US history.

In his speech, Jefferson also noted that although inflation has begun to decline, it remains unclear whether this decrease is due to higher interest rates, easing pandemic-induced supply strains, or falling energy prices.

He highlighted the uncertainty surrounding the full impact of the Fed's tightening measures, saying, "Monetary policy affects the economy and inflation with long, variable, and highly uncertain lags, and we are still learning about the full effect of our tightening thus far."

Australia retail sales turnover up 0.2% mom in Feb, appeared to have levelled out

Australia retail sales turnover rose 0.2% mom to AUD 35.14B in February, matched expectations. Through the year, retail sales rose 6.4% yoy.

Ben Dorber, ABS head of retail statistics, said retail sales rose modestly in February and appear to have levelled out after a period of increased volatility over November, December and January.

"On average, retail spending has been flat through the end of 2022 and to begin the new year."

Retail turnover rose modestly across most of the states and territories, with rises at 1.0% or less. Queensland recorded the only fall in turnover, down -0.4%.

Looking ahead

BOE will release quarterly bulletin. Later in the day, US will publish goods trade balance, housing index and consumer confidence.

Source: ActionForex.Com

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Owen Li

Commodity

Funds have dumped their bets on higher copper prices as the turbulence triggered by the collapse of Silicon Valley Bank continues to roil financial markets.

Early-year enthusiasm for copper as a proxy for China's re-opening from stringent lockdown has succumbed to the contagious fear spreading from the banking sector to other risk asset classes.

The investment community has turned net short of CME copper for the first time in five months, while funds have cut their long exposure on the London Metal Exchange (LME).

Investors' negativity towards Doctor Copper contrasts with the bullish headlines generated by the FT Commodities Global Summit.

Copper, currently trading in London around $8,900 per tonne, could surpass its previous March 2022 price peak of $10,845 and hit $12,000 this year, according to Kostas Bintas, co-head of metals at trade house Trafigura.

Goldman Sachs is also expecting higher prices, arguing that the pace of global inventory draws could reduce visible stocks to an all-time low of 125,000 tonnes by the end of the second quarter.

Fund managers, however, are having none of it. Right now macro fear is overwhelming the micro picture.

Sell Out

The CFTC Commitments of Traders reports are now fully up to date after the delays caused by the February cyber incident at ION Cleared Derivatives.

They show fund managers turning net short of the CME copper contract in early March for the first time since October last year.

The collective bear call flexed out to 9,837 contracts in the middle of the month before being trimmed back to 6,967 contracts as of March 21.

Driving that shift in positioning has been a sharp reduction in outright long positions, which have slumped from a January high of 78,429 contracts to a current 37,173. Short positions have built by only a relatively modest 6,823 contracts to 40,140 over the same time-frame.

The early-year bullish exuberance has clearly evaporated.

The LME's positioning reports paint the same picture. Investment funds bought into copper in January, the net long position expanding from 11,830 to 32,397 contracts at the end of the month. By the middle of March it had shrunk back to 13,978 contracts.

If there are any copper bulls in the investor community, they are currently lurking in the "other financial" category of the LME's reports, where positioning has gone from neutral at the start of January to a net long 7,819 contracts.

No Buy-In

The speed of the positioning reversal in copper suggests short-term players are currently in the ascendant, trading copper against the dollar and gold, which has rallied strongly as a safe-haven bet.

Copper "remains dominated by the fx (foreign exchange) with HFT (high frequency traders) leaving a heavy footprint", according to a Monday market update from LME broker Marex.

Conspicuous by its absence is any significant investor buy-in to the longer-term bull narrative in copper as an enabler of the energy transition.

"Although under-appreciated in the market today, green demand is here and already impacting fundamentals," according to Goldman Sachs. ("Commodity Views," March 23, 2023)

The bank expects clean energy demand for copper to rise by 30% year-on-year to 2.6 million tonnes in 2023, powered by an expanding electric vehicle sector and investment in solar energy.

Funds don't appear to have heard the message.

Outright long positions on both London and U.S. exchanges are small relative to 2020, when the copper price was rallying as first China and then the rest of the world emerged from the initial round of COVID lockdown.

China Recovery (Again)

Fast forward three years and China is again coming out of lockdown after the lifting of zero-COVID restrictions.

It's been a stop-start recovery because it's coincided with the national Lunar New Year holiday period, a seasonal low point for China's manufacturing sector.

China's net imports of refined copper were down by 13% year-on-year over the first two months of 2023. Inventory registered with the Shanghai Futures Exchange (ShFE) and its international branch, the International Energy Exchange (INE), mushroomed by 235,000 tonnes to 320,000 tonnes during January and February.

However, INE stocks have since stopped rising and ShFE inventory has fallen by 91,300 tonnes since the start of March.

Headline LME stocks are just 41,875 tonnes, excluding metal awaiting load-out. CME stocks last Thursday hit a nine-year low of 14,627 tons.

Bulls such as Trafigura and Goldman Sachs contend it's a very thin inventory cushion if China rediscovers its copper mojo.

Funds bought into that bull narrative at the start of the year but have evidently switched focus to the dangers flowing from the banking crisis to Western metals demand.

Which, ironically, doesn't mean that copper's next major price move can't still be generated by China.

Source: Reuters

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Samantha Luan

Forex

After the big sell-off at the end of last week, European markets started the week in a positive fashion as the banking sector angst of the last few days eased slightly.

Most sectors of the markets saw a modest rebound, helped by events on the other side of the Atlantic as reports emerged that Citizens Bank in the US had agreed on a deal to acquire Silicon Valley Bank's loans and deposits book.

US markets had a more mixed session with the S&P500 finishing higher for the 3rd day in a row, however, the Nasdaq found life slightly more difficult, finishing the session slightly lower, after US 2-year yields pushed back above 4%

This sharp rebound in 2-year yields on both sides of the Atlantic, appears to be a decent corrective to last week's sharp plunge, as markets look to reprice some of the more dire recession scenarios that were being priced at the end of last week.

The rebound in yields also suggested that a calmer tone was starting to prevail in the short term, even as sentiment seems likely to remain on the cautious side over the next few days.

This caution was reflected in the extent of yesterday's rebound in bank stocks given that none of the gains seen yesterday came close to reversing the losses seen from last Friday.

Therein lies the rub, that for all of yesterday's quieter session, the fact remains that markets are still one negative headline away from another sharp tumble.

This week's price action is also likely to be susceptible to month and quarter-end flows, which may well assign a misleading skew when it comes to what the market may look to do next.

One thing that was notable yesterday was that a number of ECB policymakers, while still making the case that inflation was still too high, started to temper their remarks with nods to concerns about financial stability, with Spain's De Cos and Portugal's Centeno making reference to these issues when making future policy decisions.

This more nuanced approach was welcomed in contrast to ECB President Lagarde's rather tone-deaf comments last week that there was no trade-off between financial stability and price stability.

Yesterday's more positive tone looks set to carry into today's European market open with a modestly higher open.

The pound could well be in focus today with Bank of England governor Andrew Bailey set to brief MPs later this morning on the Silicon Valley Bank situation with respect to its UK operations. Yesterday, Bailey made a number of comments with respect to the central bank's inflation outlook, indicating that further rate hikes may well be limited. His comments to the London School of Economics also reiterated the remarks he made last week, post rate decision, that the bank expected headline inflation to fall sharply in H2.

EUR/USD – still feels toppy anywhere above the 1.0900 area after last week' s failure at 1.0930. Feels rangebound with support at the 50-day SMA at 1.0730. Below 1.0730 opens up the 1.0520 level.

GBP/USD – edging above the 1.2300 area again but needs to push through the previous highs at 1.2345 to kick on towards the previous peaks at 1.2445. The pound continues to feel vulnerable to slipping back towards the 1.2170 area while below the highs of last week. A move below the support at the 1.2170 area, opens up the potential for a move towards 1.2020.

EUR/GBP – slipped back to the support at 0.8770/80 area. A break below here opens up the risk of a move towards strong trend line support at 0.8720, from the lows last August. On the upside we have trend line resistance at the 0.8870/80 area.

USD/JPY – feels like we may have put in a short-term base after last week's failure below the 130.00 area. We need to see a move through the 132.00 area to signal a deeper move towards 133.20.

Source: CMC

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Kevin Du

Cryptocurrency

Bullish bitcoin has been a surprise winner of the banking blowout. Yet investors aiming to ramp up their bets face an ominous obstacle: a lack of liquidity that could trigger wild price swings.

The price of the No.1 cryptocurrency has jumped 40% to around $27,700 since March 10, when the failure of Silicon Valley Bank (SVB) careered into mainstream markets.

On the flip side, though, its liquidity is drying up.

Bitcoin's market depth indicates the asset is at its lowest level of liquidity in 10 months, even lower than in the aftermath of the FTX collapse in November, according to data provider Kaiko. The market depth for the two leading trading pairs - bitcoin-dollar and bitcoin-tether - stands at 5,600 bitcoin, the equivalent of about $155 million, Kaiko said.

"As a market maker we try to provide liquidity where we can but we're facing a difficult situation," said Kevin de Patoul, CEO of Keyrock. "There is a big network effect here. In the short term at least, liquidity will remain a challenge."

Slippage, a liquidity measure describing how much prices change between the placement and execution of a trade, has also increased. Slippage for buying bitcoin with U.S. dollars on the Coinbase exchange is 2.5 times higher than it was at the start of March, said Conor Ryder, research analyst at Kaiko.

The slippage for a simulated $100,000 sell order has doubled in the past month, meaning the average price you get for each bitcoin is worse than a month ago, Kaiko said.

The network effect de Patoul referred to was the collapses of Silvergate Capital and Signature Bank, whose networks had long been used by market makers - which expand liquidity by rapidly buying and selling tokens - to transact with exchanges.

Lower liquidity typically translates to more volatile markets, especially in crypto. Kaiko's Ryder said this was possibly one factor behind bitcoin's leap this month.

CryptoCompare's Bitcoin Volatility Index spiked to 96 last week, way higher than the range of 52 to 65 it saw last month as the cryptocurrency held its footing despite broader market turmoil. The index is currently hovering around 68.

The alameda factor

Further crimping liquidity, Binance - the world's most liquid crypto exchange - ended zero-fee trading for nearly all its bitcoin trading pairs last week, hitting market makers' ability to charge higher fees for executing trades on the platform.

Liquidity for the bitcoin-tether pair on Binance has dropped 70% since the announcement, while trading volumes have fallen 90%, according to Kaiko data.

The vanishing liquidity can be traced back to the collapse of Sam Bankman-Fried's FTX exchange and hedge fund Alameda Research. Alameda was one of the biggest liquidity providers in the crypto industry, and its bankruptcy left a void that has been exacerbated by the banking sector turmoil of 2023.

While most market participants expect new contenders to gradually emerge to perform the network functions of Silvergate and Signature, they say complete replacements are unlikely to pop up overnight.

Until then, "liquidity is probably going to get worse and worse", said Joseph Edwards, investment adviser at Enigma Securities.

Furthermore, it's not just market-maker trouble that's crunching crypto liquidity; Despite bitcoin's recent rally following a lengthy downturn, many investors are still trading cautiously in the wake of the banking crises and rising interest rates, some specialists say.

"Even if some players haven't left the place, they are on the sidelines right now because of what's happening with banking turmoil," Edwards said.