Blocksmith Says: USD Fall Hints at BTC Rally

10 October 2022

The US dollar index (DXY) is one of the most important macro instruments to follow at the moment. 

It is the relative value of the US dollar against a basket of six currencies: euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. It is a proxy for US inflation as well as what the FED is likely to do with the rates environment.

Recently when the dollar has rallied, equities, commodities and bonds dropped and yields rose. Because the main crypto pairs are denominated in USD, it should follow that if the dollar rallies the pair will fall. You would think that this inverse correlation (dollar up / bitcoin down) would be consistent across time, but interestingly it is not. 

Recalling that minus 1.0 represents a perfect inverse correlation: in 2018 it was minus 0.7; in 2019 plus 0.53; in 2020 minus 0.79; in 2021 plus 0.42 and this year 2022 minus 0.89. Since we are in a high inverse correlation year, it makes sense then to consider crypto through the US dollar.   

In the chart I am showing the cycles analysis we looked at a few weeks ago. The big green arc is the 20-week cycle which started up at the end of May, as you can see it is headed down and is likely to bottom sometime in early November. In cycles theory the 20-week cycle consists of two 80-day cycles and we are currently in the second 80 day of the 20 week and this cycle is also headed down. The 80-day cycle consists of two 40-day cycles and we are in the fourth and last of the 20-week cycle now. So all of these cycles, the 20 week, 80 day and 40 day are pointed down.  And finally the shortest cycle the last 20 day is pointing  up.

The expectation is that this move is halted by the rest of the down cycles very shortly and then everything falls, which by extension suggests that Bitcoin should rally. 

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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