The DXY and Bitcoin

Bitcoin is strongly correlated to the DXY, and should be able to offer us insights for the next several legs of the cycle.

Bitcoin macro cycles have coincided with the dollar for longer than most of us have paid attention to it.

To follow the macro Bitcoin cycles, one must follow the DXY.

A crowded trade

The DXY is at a critical point, and I believe, doomed to go lower.

I begin with an admission that the short DXY trade is very crowded. Sometimes, the crowd can be right for a long time. I believe this is one of those times. Any upside on the DXY should be squeezes, not trends.

When speculators longed the DXY in 2014, it took three years to unwind.

via Free COT Data

Sometimes it doesn’t take a genius to see the obvious. All fiat currencies are being pressured by those in control.

The fundamentals

The United States has one single bipartisan issue: spending money is better than not spending money. But they don’t need to be bipartisan now. The executive and both legislative houses agree, spending is required. We will do what is necessary.

Before Covid meant anything to anyone, the Trump administration pumped an already hot market with more tax breaks. I believe this weakened the United States’ fiscal capacity, for when it was needed. Unfortunately, it became needed thanks to Covid.

Americans received one stimulus in the spring for $1200 each. Furthermore debts of many kinds were put on hold, businesses received loans, bailouts came galore, and we generally went “brrrrr”. Fiscal and monetary measures were all undertaken.

Recently, after months of nothing, Americans got a second stimulus of $600 each, with little regard to who needed it. This will shortly be rounded to $2,000, with trillions of additional stimulus on top to come from an unencumbered Biden administration.

A second round of more targeted PPP is being rolled out now, offering businesses relief if they can prove lost revenue in 2020.

More importantly, the Biden administration will no doubt unveil a legislative whirlwind, now that senate control is secured. The significance of taking both Georgia senate seats cannot be understated, in terms of legistlative agenda.

Had the Republicans maintained the senate, they suddenly would’ve rediscovered their fiscal conservatism — a conservatism they never had in control themselves. Such need for compromise is now unnecessary and the legislative steamroller is coming in.

In America, I’ll be on the lookout for several things:

  • More sustained broad stimulus. Effectively UBI
  • More sustained directed stimulus to Covid affected business like restaurants
  • A public option added to the ACA, at minimum. Perhaps more sweeping healthcare legistlation
  • Student loan forgiveness
  • A $3 Trillion infrastructure plan
  • Secondary education initiatives

And maybe more. The next year or two could be jam packed. And it will be expensive. Even if taxes are increased on the rich and high income earners, I have little doubt we’ll add significantly to overall deficits.

Modern Monetary Theory is making mainstream inroads and even the rumor of MMT advocates being heard will have dollar ramifications.

Additionally, rates are stuck. There’s nothing the fed can do. They won’t go negative and they can’t afford to go up. Yield curve control? Probably.

The dollar may stay relatively strong versus other currencies. Most other countries are implementing similar policies — fiscal and monetary.

I’m not trying to make arguments for or against any of this. I certainly have opinions. But on Narrative Street, it offers a powerful backdrop for DXY bears, and “hard asset” bulls.

The technicals

The DXY is oversold. Down 10% from the post-March-mayhem consolidation, a lot of the move has occurred. But it’s also on the precipice of a whole new move. The DXY is currently testing the early 2018 lows and trying to recover against fast moving averages (20 day shown).

A reversal to 92-93 is possible, and should be faded. The market has already been pricing in much of the fiscal situation.

Has the market priced in what can occur to further the trend under a united legislative agenda? I am not so sure it has. Going back to include the Global Financial Crisis, the next clear level is a target of 80, with a pitstop at 86. The 2018 support looks like a blip.

The vertical lines of December 2016, January 2018, and March 2020 should be familiar dates to Bitcoiners.

They align perfectly with recent Bitcoin macro cycles. If you pay closer attention to shorter term cycles, you’ll see similar strong negative correlations.

As the DXY recently bottomed, it not-so-coincidentally aligned with a pause in Bitcoin’s recent rampage. Bitcoin may continue to range while the DXY convinces itself it’s okay to continue puking. I suspect that once it realizes its destiny, we’ll see Bitcoin move higher — much higher — as the DXY trips down to 86.

There we have a lot of congestion from the 20018-2014 broad range, and also the 200 month moving average, which perfectly marked the prior lows.

I imagine with the DXY at 86, this is where Bitcoin will pause next. It may be $60-80k by the time that happens.

And for the big trip to 80? I believe that’s where this Bitcoin macro cycle will have a steadier halt. After all, these things rarely happen overnight. The correlation isn’t always perfect, but for the important moments it’s close to it. The monthly correlation is -.82 (see featured image) and the weekly is -.87. We can watch it week to week or tick by tick.

I believe Bitcoin is on a course for being six digits this cycle. I am of the mind it may take two years instead of one. But either way, watch the DXY for hints of Bitcoin’s potential, and for its areas to consider taking profit.