Dear subscribers,
Since the Fed started reducing its balance through expeditious rate hikes, the DXY has escalated and is currently edging towards levels not seen since 2002. During the same period, bitcoin has seen a weakening price action and a +200-day downward trend.
For the complete analysis and the effect of an outperforming DXY on bitcoin, be sure to check out next week’s Uncharted #20.
Let’s dig in!
TL;DR
The DXY edged towards 108, levels not seen since 2002, while bitcoin trades sideways.
The DXY is either driven by weaker global currencies or a strong demand for USD-denominated fixed-income securities.
The inverted yield curve reflected a fragile US bond market as short-term maturities’ sensitivity drove their yields higher.
The natural gas crisis pushed the EUR/USD to parity, while other global currencies took a hit.
Lower velocity and a substantial supply in circulation implied more significant household cash hoarding.
DXY making headlines
To further understand the (slightly negative, Figure 1) relationship between a strong USD (elevated DXY) and bitcoin, we need to determine whether the greenback’s tailwind comes from weakening global currencies or demand for safe-haven USD-denominated instruments.
Figure 1: DXY vs bitcoin
When looking at the global currencies that compose the DXY, it becomes apparent that the USD strengthened at their expense (Figure 2). A systematic shakedown of non-US currencies is not necessarily bearish for bitcoin; as a digital currency, it could be considered an attractive alternative investment under the right conditions.
Figure 2: Global currencies taking a hit
That is an unattractive US bond market discouraging conversions to USD to purchase dollar-denominated fixed-income securities, characterized by a flat/inverted yield curve or negative/tight spread between long-term and short-term maturities (Figure 3, red area).
Figure 3: Fragile US bond market
Considering the recent inversion of the yield curve, we can infer that the US bond market is fragile. The said fragility comes from great investor uncertainty following the unexpected grip of the Fed’s restrictive monetary policy (Figure 4). Notice how the yield curve has reverted as the Fed transitions from one stance to another, spreading uncertainty in the market.
Figure 4: Fed’s change of stance led to an inverted yield curve
Historically, an inverted yield curve has led to recessions, and subsequent DXY outperformance (Figure 5), characterized by USD hoarding as households cut back on spending and lower interest rates that enable them to hold on to their cash.
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