Bitcoin (BTC) and Ether (ETH) may face risks from potential short squeeze in the dollar index; Crypto options trader QCP Capital
The top two cryptocurrencies by market capitalization, bitcoin (BTC) and ether (ETH) have risen 70% and 56% this year, outperforming traditional risk assets by a significant margin.
However, the good times could stop rolling if the heavily shorted US dollar, which has recently found a “double bottom” price floor against major fiat currencies, sees a brief squeeze – a rally fueled by an unwinding of bearish bets, according to Singapore – based options trading firm QCP Capital.
“The biggest obstacle for crypto remains the USD – where we believe the market is strongly positioned to the short side and vulnerable to a short squeeze, which could take BTC/ETH and Gold lower in response,” QCP’s market insights team said in a note. shared with CoinDesk.
Bitcoin has historically moved in the opposite direction to the dollar index. The negative correlation between the two has strengthened recently, meaning a short squeeze in the dollar could weigh on the leading cryptocurrency and the broader market.
Shorting refers to taking bearish bets on an asset price. A short squeeze occurs when the heavily shorted asset moves higher, forcing bears with open short positions to buy back the asset to cover losses. This again increases pressure on prices.
The dollar index, which measures the dollar’s exchange rate against major fiat currencies, peaked at 114.78 at the end of September last year and has fallen more than 13% since then on hopes that the Federal Reserve (Fed) will swing away from interest rate hikes. According to Scotiabank data obtained by the Wall Street Journal, hedge fund managers’ bets against the dollar rose to about $12.2 billion as of April 25.
The dollar could see a brief pinch if Fed Chairman Jerome Powell maintains a data-driven policy stance on Wednesday, contradicting markets positioned for hints of a so-called dovish pivot in favor of renewed rate cuts.
“Looking at the Fed prices, you can probably say the pivot is fully priced in. It’s the US banking crisis/debt ceiling/recession that is the beta for the USD from here. We think the 12% drop in the USD is pricing in the more pessimistic scenarios on these three and which we believe make it ripe for a short-term squeeze,” QCP’s team told CoinDesk.
Fed funds futures show traders expect the Fed to deliver its latest rate hike of 25 basis points later on Wednesday and resort to interest rate cuts from July. The central bank began its tightening cycle in March last year, cracking down on risk assets, including cryptocurrencies, and has raised interest rates by 475 basis points since then.
Two weeks ago, the dollar index rebounded from levels near its February low of 100.82, confirming what is known as the bullish “double bottom” pattern in technical analysis.
The pattern tells us that buyers have stayed strong twice around the same area, creating a floor to push prices higher.
“We note the positive divergence in the RSI and MACD, and a potential double bottom at 101,” QCP’s insights team said. “For the USD (DXY), the key level to the top is 102.5, where we expect a break higher to lead to a sharp correction lower in crypto.”
The relative strength index is an indicator used to measure overbought and oversold conditions, while the MACD measures trend strength and trend changes. A positive divergence occurs when the asset’s price hits a new cyclical low while the RSI and/or MACD begin to climb, indicating an impending bullish shift in momentum.
