The US Dollar Index is approaching new year-to-date highs, but Bitcoin whale activity suggests this could be a “dead cat bounce”.
As summer approaches, a sudden heat wave is sweeping the financial markets.
This heat is coming in the form of the US Dollar Index (DXY), which has been on a notable uptrend since late April, reaching levels not seen since the banking crisis in early March.
The USD spike has raised concerns among market participants due to its highly inverse relationship with Bitcoin (BTC), a topic many macro and crypto analysts have discussed. discussed several times in 2023.
The implication of this inverse correlation means that when the USD rises, BTC decreases and vice versa. The chart below shows the year-to-date performance of DXY (blue line) and BTC (orange line) emphasizing this relationship one step further.
Notice how Bitcoin’s 2023 performance has been boosted as the dollar depreciates. Not coincidentally, DXY hit a year-to-date low near 100.80 on April 13, roughly the day BTC hit its year-to-date high of over $31,000. Since then, however, the two have tended to reverse.
Feeling nervous about the kind of summer coming for the market if the USD uptrend continues is certainly justified at the moment. After all, the last time DXY broke through these levels, BTC was trading below the $20,000 mark.
On the surface, this means that BTC still has a pretty deep correction before any hope of a new high this year emerges.
Looking deeper, however, it’s clear that a number of different signals are starting to emerge that suggest the dollar rally may be coming to an end.
Let’s take a look at them to see what’s been driving DXY’s recent strength and zoom in on a notable segment of the market that has remained untouched by Lord Sam’s recent resurgence.
THE RELATIONSHIP BETWEEN BTC AND DXY END
Back in March, similar to now, a sharp drop in federal funds futures was the main driver of DXY’s strength.
For readers who may not be macroeconomic enthusiasts, federal funds futures represent the final interest rate or market expectations for when the Reserve bull cycle will be. Union will end.
When federal funds futures fall, terminal interest rates rise, and so does the dollar. The reverse is also true, which is another inverse correlation.
To track this leading indicator, traders follow the federal funds futures ticker (ZQN2023 on TradingView). The chart can be a bit complicated, with 100 representing zero interest rate expectations, and each 0.10 increment below representing a 10 basis point (0.10%) rate increase.
Currently, the histogram is 94.83, implying a final ratio of 5.27%. This shows that the market still expects the Fed to raise rates by at least 27 basis points beyond the current 5% level.
This is the lowest level that federal funds futures have reached since early March, just before the banking crisis hit.
Looking at the chart below again with BTC (orange line) at the top shows that the expectation of the mid-March reversal was a major driver of the drop in DXY and thus, Bitcoin rallied above $30,000.
If federal funds futures once again fall back below 94.50, as they did in March, there is a good chance the market will fall back under the strong selling pressure caused by this correlation. .
Notably, federal funds futures contracts rallied on Wednesday afternoon, May 31, when they were up more than 10 basis points from their lows.
If this trend continues and the ZQN2023 contract rebounds above 95, it will signal market confidence that the Fed rate hike cycle is over, potentially paving the way for a rate cut. Such monetary policy easing is more likely to drive BTC up and down towards DXY.
This is especially true if DXY drops back to new 2023 lows from here and breaks below long-maintained support near 100. Such price action would open the door for BTC to make a fresh rally. over $30,000.
And with that in mind, there is one notable group of crypto market participants that appear to be leading such a reversal: Bitcoin whales.
Whale BITCOIN CALCULATES
Bitcoin whales are classified by wallet addresses containing more than 10,000 BTC.
A smart currency that data scientists on-chain research intensively.
As shown on the chart below, Bitcoin whales (indicated by red dots) have been steadily increasing their net holdings every day since April 17, a trend that coincides with Bitcoin reaching year-to-date high above $31,000.
market or on the way to higher highs, rather than tops. This anomaly raises a thought-provoking question: Did these whale wallets buy the top for the first time, or was April 17 not the top?
This behavior from the biggest players in the Bitcoin market raises questions about the legitimacy of the DXY pump in May and adds uncertainty to the bearish outlook, especially when combined with the A notable increase in federal funds futures.
As always, the market is doing its best to keep the participants one step behind the next trend.
What remains to be seen is the rise in terminal interest rates and the DXY in May possibly due to escalating concerns about the US debt ceiling deadlock. With that issue now under reconsideration (pending final vote), one wonders if this will lead to the USD reverting to a downtrend and Bitcoin back above the $30,000 mark.
For the remainder of the second quarter, it is important to keep a close eye on the movements of final rate expectations, Bitcoin whale activity, and DXY, as these data points are likely to provide clues. may act before the next big move.
The coming weeks are sure to shed some light on these intriguing dynamics, shaping the path for both the US dollar and the crypto market at large during the summer months and beyond.