Goodbye to the dollar-bitcoin relationship
In recent issues, we have highlighted that Bitcoin’s price has been a function of broader macroeconomic conditions of rising yields and debt unwinding over the past several months, leading to increased stock market volatility and increasing US dollar strength.
Recently, the Dollar Currency Index (DXY), which tracks the relative strength of the US dollar against other major global currencies, is making new 20-year highs as major currencies like the euro, Japanese yen and pound sterling continue to weaken . The latest surge comes as the Bank of Japan is tripling its yield curve control efforts, buying an unlimited amount of 10-year bonds each business day to cap yields at 0.25%.
So what does a rising DXY mean for Bitcoin and other assets? Even if the dollar depreciates against real goods, services and financial assets, all debtors are forced to sell USD-denominated assets to cover liabilities during deleveraging events.
Today we also get the latest US gross domestic product (GDP) data for Q1 2022, showing the economy contracted 1.4% compared to an expansion consensus of 1.1%. The slowdown in growth in the world’s major economies, which will herald a shift in market regimes to a more deflationary environment later this year, was a key assumption in our base case to anticipate further downside for risk assets in 2022.
If we see broader market expectations for growth falling further this year, then this change is likely to be rather detrimental to risk assets.
In our view, the worst is yet to come for the markets and Bitcoin. However, the type of loan processing and deleveraging we are facing today is one of the main reasons we expect the market case for Bitcoin to grow as these events unfold.