Bitcoin (BTC) and Ether (ETH) are no longer positively correlated to the U.S. Dollar Index (DXY). The correlation between BTC and the DXY has decreased, from 0.84 on November 19 to -0.36 today.
The range of correlation coefficients, which quantify the connection between two assets, is from 1 to -1. While the latter suggests an inverse relationship, the former suggests a direct pricing relationship between the assets.
Before crossing into positive territory on November 9, BTC and the DXY had maintained a consistently inverse relationship since July. The correlation between the two assets decreased to -0.94 in August.
The timing of the reversal coincides with FTX-related market turmoil because the shift in pricing relationship occurred on the same day that Binance and FTX’s tentative deal fell through. The return to negative correlations signals that:
- Markets have likely reset and found a new level of comfort specific to prices
- Macro narratives will start to take hold again, as what impacts the dollar will likely be seen in crypto prices
Regarding the first issue, bitcoin is once again trading in a range, albeit closer to $16,500 than $19,500. After concerns about FTX and associated contagion surfaced, asset prices were reduced by 15%. The average true range (ATR), a measure of volatility, has decreased by 40% over the past two weeks as markets have started to stabilize.
While its volatility has decreased 35%, ETH’s correlation to the DXY has also turned negative. With a 0.90 coefficient, the correlation between BTC and ETH is still very high.
Regarding the second point, as the price of BTC stabilizes and inverse correlations resume, BTC will also be affected by factors that are important for the movement of the U.S. dollar. When deciding on the fed funds rate, investors should consider the remarks made by Federal Reserve Chair Jerome Powell on Wednesday and the central bank’s subsequent meeting on December 14.
Asset managers keep limiting exposure
Institutional-sized asset managers have kept downsizing their long position to BTC despite the lack of price volatility. The third time in as many weeks, according to the most recent Commitment of Traders (COT) data, asset managers reduced their long exposure by 247 contracts.
Asset managers made up 43.4% of the long open interest on the Chicago Mercantile Exchange on November 8. The most recent publication shows a decrease in that percentage to 29.7%. Leveraged funds now account for 31.3% of long open interest and 47.2% of short open interest, which represents the highest percentage of open interest.
The increase in long positions is down from the prior report’s gain of 1,367 contracts by 378 contracts. The change may be due to the BTC February contract now shifting towards contango rather than backwardation. When futures prices for later months surpass those for nearer months, this is known as contango. As expiration draws near, prices sometimes move in the direction of the higher futures contract prices due to this circumstance, which is frequently positive for spot prices.
DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.
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