As the summer season arrives, an unexpected heatwave is gripping financial markets
This heat is coming in the form of the US Dollar (DXY) which has been on a remarkable uptrend since late April, reaching levels unseen since early March’s banking crisis when the dollar wrecking ball wreaked havoc on asset prices.
This surge in the dollar has raised concerns among market participants due to its high inverse relationship with Bitcoin (BTC), a topic many macro and crypto analysts have discussed repeatedly in 2023.
The implications of this inverse correlation means that when the dollar rises, BTC falls and vice versa. The chart below showing the year-to-date performances of DXY (blue line) and BTC (orange line) underscores this relationship a step further.
Notice how, Bitcoin’s 2023’s performance has been propelled by a downward dollar. Not coincidentally, DXY reached its year-to-date low near 100.80 on April 13, nearly the exact date BTC reached its year-to-date high of just over $31,000. Since then, however, both have been trending in opposite directions.
Feelings of unease over what sort of summer could be in store for markets should the dollar’s uptrend continue are certainly justified at present. After all, the last time DXY broke above these levels BTC was trading below the $20,000 mark.
On the surface, this would imply that BTC still has quite a deep correction ahead before any hopes of new year-to-date highs emerge.
Taking a look deeper however, it’s clear that some divergent signals beginning to emerge which suggest this dollar rally could be nearing 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 who has remained un-phased by Uncle Sam’s recent resurgence.
The relationship between BTC and DXY is terminal
Back in March, similar to now, plummeting federal funds futures were the primary driver of DXY’s strength.
For readers who might not be macroeconomic nerds, the federal funds futures represent the terminal rate, or the market’s expectation of when the Federal Reserve’s hiking cycle will come to an end.
When federal funds futures fall, the terminal rate rises and consequently the dollar rises as well. The opposite is also true, which is nother inverse correlation.
To track this leading indicator, traders follow the federal funds futures ticker (ZQN2023 on TradingView). The chart can be a bit intricate,…
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