Correlation between crypto market and Nasdaq turns positive ahead of US CPI release

The correlation between the crypto market and the tech-heavy Nasdaq stock index has turned positive, indicating digital asset investors’ renewed focus on risk appetite on Wall Street.

The 90-day correlation coefficient between the crypto market’s total capitalization with the Nasdaq has risen from -0.12 to 0.74 in four weeks, reaching its highest since early November, according to data obtained from charting platform TradingView.

In other words, the crypto market is once again moving in step with tech stocks. On days when tech stocks trade higher, cryptocurrencies, including bitcoin (BTC) and ether (ETH), are likely to do the same. Conversely, a decline in tech stocks can drag the crypto market down.

Speculation that the Federal Reserve (Fed) would resort to interest rate cuts later this year is perhaps behind the renewed correlation between the liquidity-dependent risk assets. The long-standing positive relationship had crumbled in November, thanks to the spectacular collapse of Sam Bankman Fried’s FTX exchange that saw crypto investors dump their tokens despite the risk reset on Wall Street.

Correlation is determined by comparing the returns or general movements of two assets or products over a specific period of time. A correlation close to 1 suggests that the two assets are moving in lockstep, in the same direction. Meanwhile, a negative correlation means that the two assets move in opposite directions.

The renewed positive correlation implies increased sensitivity of cryptocurrencies to macroeconomic data such as the US Consumer Price Index (CPI), which injects volatility into stock markets. CPI days were among the most volatile for US stocks last year, according to MarketWatch.

Tuesday’s US CPI report from the Bureau of Labor Statistics is likely to show annual inflation fell to 6.2% in January from December’s 6.5%, according to Reuters estimates sourced from FXStreet. Core CPI, which excludes the volatile food and energy component, is forecast to fall to 5.5% from 5.7%.

A better-than-expected number could dash hopes of the so-called Fed pivot in favor of easing, pushing tech stocks and cryptocurrencies lower.

“Tuesday’s CPI release is going to be a big number. Should the CPI come in higher than expected, given the massive NFP surprise seen recently, this could prove quite bearish for risk assets,” crypto services provider Amberdata’s Gregoire Magadini wrote in the weekly newsletter published on Sunday.

According to Andreas Steno Larsen, founder and CEO of Steno Research, the CPI data will probably come in softer than expected. This will strengthen the hope for an interest rate cut at the Fed.

“Based on our models and indicators — leading as well as lagging — we estimate print to come in at close to 6.1% and 5.3% for headline and core, respectively,” Larsen said in a note sent to subscribers last week.

“Wages have slowed in all meaningful forward-looking gauges, while housing is printing extremely relative to reality in the CPI, meaning we see greater downside risk/reward in the core relative to the headline,” Larsen noted, while predicting positive contributions from energy component, prices of goods, including used cars, and fatigue in good prices.

The total crypto market capitalization recently rose to a six-month high of $1.06 trillion and was at $948 billion at press time, representing a 25% year-to-date gain. The Nasdaq has risen 12 percent this year.