This post will examine how decisions of central banks can impact Bitcoin’s price because of intricate correlations between asset classes.
The Butterfly Effect Begins in Washington & Tokyo
The US Federal Reserve recently ended quantitative easing (QE), and promised to keep interest rates “extraordinarily low” for an extended period of time.
However, the QE spotlight has now been placed on the Bank of Japan (BOJ). They have decided to increase their bond purchases by a third. Further, the BOJ is not only buying bonds, but also stocks and real estate. Meanwhile, the Japanese pension fund announced it will increase its allocation to domestic and foreign stocks.
The Bank of Japan’s Impact on USD
On the tail end of this, global stock markets roared to the upside. The Japanese stock market(Nikkei) has reached a 7 year high and blasted through 14 year old resistance; it looks poised for more gains and to end its 25 year bear market. This has lead to the Yen declining to a 7 year low — all as an attempt to make Japanese multinational corporations more competitive.
As a result of this, the BOJ is exporting deflation to the rest of the world and sending the USD to 5 year highs. According to the chart below, the USD is looking to break through major resistance.
The performance of the USD is most evident when compared to to other major currencies:
The Impact of USD Appreciation on Commodities
As commodities are priced in USD, they have been hit hard by the USD appreciation. In particular, energy, agriculture, and precious metals commodity groups have suffered the most.
Below is a chart of Gold overlayed with the USD since 2010. Although the USD weakens any commodity, it is worth taking a closer look at its relationship with gold, which has a .87 correlation with Bitcoin.
How Does This All Impact Bitcoin?
The last and final chart overlays Bitcoin with the S&P. Until August 2014, they moved in the same direction. But since then, they have decoupled and started moving in the opposite direction. This was around the time the USD starting making its big move to multi-year highs.
While these are small data-sets, we can still find patterns in global capital flow.
It appears that a major correction in the S&P or an easing of USD strength would result in a commodity rally. This would add more fuel to Bitcoin’s recent rally (November 2014). Hence, if the Federal Reserve did not end QE and the BOJ did not increase its purchases of bonds, stocks and real estate, Bitcoin’s current rally might have been more aggressive.
Another factor to consider is seasonal patterns. November/December has previously seen strong uptrends in both Gold and Bitcoin. Obviously, this pattern holds true with Gold for a much longer period of time. Regardless, we are still seeing Bitcoin repeat last year’s pattern, suggesting traders are suddenly accumulating ‘cheap coins’. This is despite the fact that Bitcoin has been under-performing since August 2014.
‘The bottom is in’ — probably. The last consideration traders should make is the successful re-test of $330. It was a classic re-test on low volume, which is what traders like see. It also validates the current run up. So far, Bitcoin’s latest bull run appears to be confirmed after the price pierced a key layer of resistance, which is indicated by Ichimoku clouds:
Written by George Samman, former Wall Street Portfolio Manager and Co-Founder and COO of BTC.sx
