Blocksmith Says: DXY to Decline – Crypto Too

16 August 2022

One thing to consider when looking at Bitcoin is the strength or weakness of the US dollar – 85% of Bitcoin trading being US dollar based. The way most market participants look at the US dollar is through the DXY Index, which factors in a basket of six currencies: the Euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc, with the Euro having the highest weighting at nearly 58%. 

If the US dollar index (DXY) is strengthening (getting more expensive versus the other currencies) then because it is the denominator in the Bitcoin-USD pair, the fraction becomes smaller (less valuable).  Conversely when the dollar weakens (gets cheaper), then the Bitcoin-USD fraction becomes larger (more valuable). So far this year the correlation between Bitcoin and DXY has been minus 0.86, which is close to being able to say they basically move in opposite directions. In which case, it’s worth looking at. 

The chart today is a basic cycles view of DXY Index basis daily price data. There are multiple interacting cycles within any market from very long to very short. In this chart, we are just focusing on the 80-day and the 20-week cycles. The way cycles work is that they are harmonically related, which simply put here, means there are two 80-day cycles in one 20-week phase.  The last 20-week trough was at the end of May and the next trough is due in early November. The recent low on 11 August very likely marks the trough of the second 80-day cycle.  

Currently we can say that the 20-week cycle is falling, thus the broad sweep is down to November.  Meanwhile the 80-day cycle is new and rising, but into the headwind of the falling 20-week cycle. The preferred view therefore is that DXY rallies a little more, then rolls over and declines for the next few months, which is broadly speaking technically constructive for crypto.

Christopher Grafton
Christopher Grafton

Chris has been working in the markets for over 15 years variously as a broker, analyst and researcher. He is the author of a well-known book on Hurst cycles analysis, and runs his own market analysis software platform on Bloomberg. He’s also a keen student of both the cello and Brazilian Jiujitsu.

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