How to Navigate USD Weakness and Bitcoin #62

Market Meditations | December 29, 2020

The fate of Bitcoin and cryptocurrencies shares an intractable bond with the U.S. dollar. In today’s education letter, we explore this relationship and indicators of U.S. dollar weakness/strength.

Dear Meditators

We hope you had a restful, long weekend ? Now: time to get back on it.

Delighted to share our education letter with you this Tuesday.

The fate of Bitcoin and cryptocurrencies shares an intractable bond with the U.S. dollar. In today’s education letter, we explore this relationship and indicators of U.S. dollar weakness/strength. Providing our readers with an edge in the market.



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How to Navigate USD Weakness and Bitcoin


Reports have emerged this month that the USD is at its lowest point in almost 2 and a half years. The social, political and economic impact for many investors and ordinary people has been severe.

On the other hand, some have benefitted. In the words of Bill Noble, Chief Technical Analyst at Token Metrics:

“A weak Dollar is a dream scenario for crypto”. Bitcoin and other cryptocurrencies “are a legitimate component of the foreign exchange market, and it’s like any other currency. It rises as the Dollar falls.” 


It goes without saying that Bitcoin and the dollar share an intractable bond: the value of Bitcoin is still denominated in USD. 


Dollar weakness also increases the appetite of institutional investors for Bitcoin ?Some, including Michael Saylor, CEO of MicroStrategy, have explicitly stated that they were attracted to Bitcoin due to perceived dollar weakness. 

The expectation is that dollar weakness will continue for some time. That is, the impacts of the coronavirus pandemic on the economy will take some time to recover from. As such, quantitative easing and lower interest rates will remain: and so too will USD weakness.

With that being said and given the implications on Bitcoin and other cryptocurrencies, it is useful to understand some indicators that USD weakness will persist.

This way, you can be ahead of the market and anticipate further weakness or indeed strength

Fundamental and Psychological Relationships Exist Between the USD and other Markets

1️⃣Gold

Precious metals such as gold and silver are typically regarded as hedges against inflation.

As such, gold prices tend to move in the opposite direction of the U.S. dollar (inverse correlation). Note we are talking long term. Short term correlations are harder to interpret.

❗️Tip: Look for confirmation of USD weakening in long term strengthening of gold prices. 2020 YTD returns on gold are up 20% which is consistent with the theme of USD weakening.


2️⃣Oil

Oil shares a similar inverse correlation to the USD as gold.

Again, this is true of long term correlations. The short term is more driven by oil-specific supply/demand shocks.

Oil also has an asymmetric bias. Meaning it is likely to exhibit greater strength on a falling dollar compared to weakness on a rising dollar.

Oil is experiencing a gradual uptrend with 3 month returns up over 20%.

? Note: In April, the short term dynamics dominated as oil producers ran out of space to store the oversupply of crude left by the coronavirus crisis, triggering an historic market collapse.


3️⃣Stocks

Prior to the 2008 financial crisis, there was very little correlation between currencies and stocks.

It was only after the global recession that the risk on/risk off relationship was established.

The premise is stocks are considered ‘risky’ and the dollar considered ‘safe’.

When market sentiment is more positive, investors seek risk and buy stocks, reducing the demand for dollars (leading to dollar weakness). 

❗️Tip: Look for a long term recovery in stock markets (such as the S&P 500 index) as evidence for a ‘risk-on’ move and subsequent USD weakening. 1 year S&P 500 returns are up over 14% and have staged a gradual recovery from March lows.

Conclusion

Look to these 3 indicators for signs of USD weakness/strength. This will help you as a trader with a position in cryptocurrencies and also to pre-empt the level of demand amongst institutional investors.


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Disclaimer: The content in this newsletter is for informational purposes only. Nothing in this email is intended to serve as financial advice. I am not a financial advisor. Every investment and trading move involves risk. Do your own research when making a decision. 


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