With the arrival of summer, an unexpected heat wave seizes the financial markets
This heat is coming in the form of the US dollar (DXY), which has been on a notable bull run since late April, reaching levels not seen since the banking crisis in early March, when a crushing dollar wreaked havoc on asset prices. risky.
This rally in the dollar has raised concerns among market participants due to its high inverse relationship with Bitcoin (BTC), a topic that many cryptocurrency and macro analysts have repeatedly debated in 2023.
The implications of this inverse correlation mean that when the dollar goes up, BTC goes down and vice versa. The following graph, which shows the evolution of the DXY (blue line) and BTC (orange line) so far this year, further highlights this relationship.
See how Bitcoin’s performance in 2023 has been driven by a falling dollar. Not coincidentally, DXY hit its year-to-date low near 100.80 on April 13, almost the same date that BTC hit its year-to-date high above $31,000. Since then, however, both have tended in opposite directions.
Uneasy feelings about what kind of summer might be in store for markets should the dollar’s uptrend continue are certainly justified today. After all, the last time the DXY broke above these levels, BTC was trading below $20,000.
At first glance, this would imply that BTC still has quite a deep correction ahead before any hope of new year-to-date highs emerges.
However, if we look a little deeper, it is clear that some mixed signals are starting to emerge that suggest that this rally in the dollar may be coming to an end.
Let’s take a look at them to see what has been driving the recent strength of the DXY, and zoom in on a notable segment of the market that has remained unmoved by the recent Uncle Sam resurgence.
The relationship between BTC and DXY is terminal
In March, as now, the fall in fed funds futures was the main driver of DXY strength.
For readers who are not macroeconomics experts, Fed Funds futures represent the terminal rate, or the market’s expectation of when the Federal Reserve’s rate hike cycle will end.
When federal funds futures fall, the terminal rate rises, and consequently the dollar rises as well. The converse is also true, which is another inverse correlation.
To follow this leading indicator, some traders follow the federal funds futures ticker (ZQN2023 on TradingView). The chart can be a bit tricky, as a reading of 100 represents zero interest rate expectations, and each 0.10 increase below indicates a 10 basis point (0.10%) rate hike.
Currently, the chart reads 94.83, implying a terminal rate of 5.27%. This suggests that the market still expects the Fed to raise rates by at least 27 basis points above its current rate of 5%.
This is the lowest level reached by federal funds futures since early March, just before the banking crisis broke out.
If we look at the chart below again with BTC (orange line) above it, we see that the reversal of interest rate expectations in mid-March was a big driver of the DXY decline and consequently Bitcoin’s rally by above USD 30,000.
If the fed funds futures were to drop below the 94.50 level again, as it did in March, it would be very likely that the market would come under strong selling pressure again due to this correlation.
In particular, these federal funds futures experienced a strong rally on the afternoon of Wednesday, May 31, when they rallied more than 10 basis points from the lows.
If this trend continues and the ZQN2023 contract rises above 95 again, it would indicate that the market believes the Fed’s hike cycle is over, which could pave the way for rate cuts. This monetary policy easing would be more than very bullish for BTC and bearish for DXY.
This is especially true if the Dollar Index falls back to fresh 2023 lows from here, and breaks below its long-held support level near 100. Such a price action would open the doors for BTC to make a run. renewed above USD 30,000.
And with that thought in mind, there is a notable cohort of cryptocurrency market participants who seem to be at the forefront of such investing, the Bitcoin whales.
The activity of some Bitcoin whales
Bitcoin whales are categorized by wallet addresses that hold more than 10,000 BTC.
A kind of smart money that is intensively studied by on-chain data scientists.
As shown in the chart below, Bitcoin whales (represented by red dots) have been steadily increasing their holdings on the network every day since April 17, a trend that coincided with the time Bitcoin reached its peak. maximum so far this year above USD 31,000.
This behavior differs from previous trends, in which whale wallets accumulated Bitcoin at market lows, or on the way to higher highs, rather than at highs. This anomaly raises a thought-provoking question: have these big investors bought the high for the first time, or was April 17 not the high?
This behavior of the large investors in the Bitcoin market calls into question the legitimacy of the DXY rally May and adds uncertainty to the bearish outlook, especially when combined with the notable rise in fed funds futures.
As always, the market does its best to keep participants one step behind the next trend.
What remains to be seen is to what extent the rise in terminal rates and the DXY in May can be attributed to escalating fears over the US debt ceiling standoff. With this issue already in the past (pending final votes), one wonders if this will send the dollar back to its downtrend and Bitcoin break above the $30,000 barrier.
For the remainder of Q3 it will be crucial to closely monitor movements in terminal rate expectations, DXY and Bitcoin whale activity, as these data points are likely to provide actionable clues before the next big thing hits. motion.
The next few weeks will undoubtedly shed light on this intriguing dynamic, paving the way for both the US dollar and the broader cryptocurrency market into the summer months and beyond.
This article does not contain investment advice or recommendations. All investing and trading involves risk, so readers should do their own research before making a decision.
This article is for general informational purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.