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Inflation is the single biggest enemy of economic growth. It eats away people’s savings and those on fixed incomes. US CPI for august 2022 stood at 8.3%, highest inflation rate in decades. Naturally, the Federal Reserve’s priority is to tame inflation and the only reliable tool at its disposal are interest rate hikes. As expected, the Fed has waged war on inflation by multiple interest rate hikes leaving investors scramble for safe havens like the US dollar.
After forming a double bottom in Jan 2021 and May 2021, dollar index (DXY) surged exponentially to current levels near 113 as depicted in the image below. The macro factors that have driven the dollar to these levels are well understood and documented by now. A very hawkish Fed has a clear intention of keeping inflationary pressures in balance. Inverted yield curves and equity underperformance are typical of this late-cycle economy.
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<source: tradingview>
Yield curves for government bonds are an important indicator in financial markets. An “inverted” shape for the yield curve occurs when short-term yields are higher than long-term yields. This occurs when investors predict a lower interest rate in the future than current interest rate.
Equities (also known as stocks), inherently, carry lots of risks. They offer no guarantees on dividends. So, when the economy is heading into a recession, stocks take a bad beating as profitability of such risky assets will be at stake. And, as expected, most of the tech stocks have plunged more than 30% with outliers like Snapchat losing more than 80% in a year.
Bitcoin (BTC), which was majorly uncorrelated to the rest of financial markets in its early stages, has been a victim to macroeconomics recently. BTC, which is currently hovering above $20,000, has been swaying to the strains of every major economic shock like US CPI data, Europe’s energy crisis, Russia-Ukraine war etc. With such interconnectedness to the world economy, BTC and tech stocks will be treated on the same footing if not equal. Moreover, DXY has had an inverse effect on the performance of BTC as evident from the depiction shown below. As one can notice, the bearish dollar corresponds to bullish BTC and vice versa.
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<source: tradingview>
Winning is a matter of perspective. From an impact standpoint, the US dollar will likely dominate the rest of the world currencies including BTC (which was originally invented as an alternative form of currency) in the near future. From a performance perspective, BTC continues to be one of the best performing assets in the last 10 years as it had a meteoric rise despite the current lull in the crypto market. Hence, investors are advised to understand the cyclical nature of markets that oscillates between risk-on and risk-off investments. Instead of marrying into one investment thesis, it’s better to gauge the macroeconomic climate in an objective way, adjust risk tolerances and deploy bullish or bearish strategies accordingly.
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Disclaimer: This article was authored by Giottus Crypto Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.