US Dollar Index breaks Market Structure as US Bond Sell-off Accelerates

7 min readAug 20, 2020

In this edition, we’ll take a closer look at the Turkish lira after dropping 20% since the start of the year, the US Dollar and bond sell-off, and bitcoin’s short-term u-turn in the context of the broader trend and other market data.

Let’s dig in.

Turkish lira drops 20% this year

Trouble in Turkey continues to bubble as the local fiat currency — the Turkish Lira — drops over 20% this year.

Inflation in the country is understandably affecting consumer confidence in the purchasing power of the lira fiat currency. According to a report by Reuters on August 14th, locals are essentially dropping the lira, converting it to dollars and buy gold.

This turn of events is happening despite market interventions and reassuring stories about monetary stability from the government. Currently, inflation (that we know of ) is at 11.8% and has overtaken interest rates offered by local banks.

A resident was quotes as saying that he bought gold as his choice for a safe haven asset:

“ I think it is the best investment right now so I converted my dollars to buy gold, I might withdraw my lira and buy gold with it too, but I am scared to go to the bank right now because of coronavirus. “

The report seems to indicate that locals expect things to get worse before they get better.

Considering that Turkey’s economy is highly dependent on imports, the consequences of the pandemic have had a dramatic effect on the country, accelerating inflation while also causing a payments crisis. Now that bitcoin’s total market cap has become greater than the Bank of America and several other fiat currencies like the Argentinian and Lebanese currencies, perhaps the Turkish Lira is next in line.

USD Index and US bonds break down

A few weeks ago, we pointed out the possibility of the US Dollar losing purchasing power and possibly breaking out of a critical technical structure. Unfortunately for USD holders, it appears that this is happening as we speak.

Purchasing power for the dollar has been falling in tandem with fiat currency markets — though notably at a much slower rate. However, this is set to change in part due to the unfathomable amounts of dollars in circulation.

At the same time, this alone is unlikely to account for all the reasons as to why the USD is falling.

If we take a look at the US bond market, the picture becomes much clearer. in fact, everything up to 30-year bonds are being offloaded by portfolio managers. The Fed’s liquidity injections and bond yields have broken the floor, making the entire asset class a seller’s haven.

Currently, holding US Dollars is a losing bet and soon enough, once US bonds join their Eu-counterparts into negative yielding territory, the incentive to buy alternative assets will be that much greater.

This turn of events will almost certainly send bitcoin higher, but the consequences on the wider society who are not at least hedged with alternative assets won’t be in a great situation, which is just sad and infuriating in a way.

The guys who are least clued-in always get hit the hardest in this perpetual wheel of fear and greed.

Technically speaking

Bitcoin is in a developing short-term situation that should inform expectations for the next few days to weeks.

Given that real fomo-demand similar to 2017 has not entered yet, the trend’s strength is somewhat dependent on a number of external factors — namely the strength & weakness of the US Dollar (which is in turn dependent on other factors) and apparently (though I’d argue to a lesser extend) heavy physical commodities like gold and silver (with which it has been strongly correlated with recently).

One thing at a time though.

Bitcoin dominance bounces at the 60th percentile

Bitcoin’s market dominance (according to Trading view) has bounced off the 60% level. At the same time, the ETH/BTC pair has experienced a slight correction, though we’re not out of the woods yet. Purely as a gut feeling, if this trend continues, it’s likely that capital will continue to flow back into bitcoin as people either retreat or fomo back into the king.

Indeed, this could also happen even if the entire crypto market cooled off. In fact, historical precedent tells us that altcoins retreat into bitcoin when altseason is over — dampening the blow on crypto portfolios.

As such, a retreat into bitcoin is all but guaranteed under present conditions, provided bitcoin doesn’t end up ranging eternally as it did a few weeks ago.

As a side note, the fundamental narrative behind ethereum also seems to be on shakier ground now that the mini in-group trading DeFi euphoria is cooling off. I suspect it will return with a vengeance at some point.

It’s always cute to see an old acquaintance get in touch to explain the new “hottest DeFi” project as if he really believes in it. Due diligence on these unregistered securities is mostly non-existent and many people will get flushed out betting on vaporware.

Daily HTF: history doesn’t repeat itself, but it often rhymes?

In a prior mailout, we spoke about the possibility that bitcoin is in an accelerated fractal. While this is purely speculative and nobody can accurately predict the future, the resemblance with previous price-action is uncanny.

If this copy & paste price-action were to continue, then one would expect a period of consolidation before the uptrend resumed sometime in early September (10th).

This is technically possible, but I leave it in your good judgement to assign or derive anything meaningful from this developing fractal.

Bitcoin 4-hour LTF: channel or range?

If you followed me on Instagram, you’ll have been aware of the probable drop from $12,000 to the 20-daily EMA, which became more likely due to a lack of follow-through on lower time-frames after the breakout.

On the 4-hourly, bitcoin appears to be in the process of printing a higher low on the lower trending support in the newly established channel. Provided the 20-daily EMA at around $11,500 holds, bitcoin will probably re-visit the top of the channel.

On the flip side, should this area break decisively below the support, then the structure can be thrown away and one can assume that bitcoin will range above $10,500, with $11,400 probably becoming the pivot point and $12,000 being the range high. In such a scenario, the 17th August breakout will be considered as a fake-out and irrelevant price-action.

All in all, bitcoin’s lower-time frame price action provides less clarity on the immediate future, so allowing the trend to develop before jumping in is the prudent approach. Bulls will be looking for a bottoming structure and a possible divergence on lower time-frames before becoming more confident in longing. On the other hand, bears are currently in the process of proving their resolve as they attempt to break the lower trending support — which is entirely possible.

The question is: amidst a backdrop of a highly bullish trend, price-structure, a dropping US Dollar and infinite money, is it really likely that bitcoin will retest lower levels below $10,500?

If ever there was a time to be bullish on bitcoin, it’s now. Those who think they have “missed the boat” need to set their emotions aside, lower their entry capital (if you’re uncomfortable) and hedge appropriately (or risk missing yet another opportunity).

This is not financial advice, but common sense which will be obvious to everyone in hindsight.

Gold recovers; rests in bullish to neutral territory

At the time of writing, gold has recovered over 6% from its 9% drop. The commodity is in bullish territory on the daily RSI and has not printed any warning signs as of right now. Reclaiming the $2,000 area on a daily and weekly time-frame would be key for continued bullish momentum. Presently, there isn’t much more to say other than this looks like a healthy correction in a broader uptrend.

May your gains be high and your losses low.

Catch you next time.

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