Bitcoin Price Talking Points:
- For the first five months of 2019, cryptocurrency markets largely followed movements in EM FX, mainly the Turkish Lira (USDTRY).
- In recent weeks, the EM FX driver has flipped between the Turkish Lira (USDTRY) and the Chinese Yuan (USDCNH).
- The one-month correlation between USDTRY and BTCUSD is -0.52, while the one-month correlation between USDCNH and BTCUSD is 0.84.
Looking for a guide on how to analyze Emerging Market Currencies (EM FX)? Read the Emerging Markets Crisis Monitor.
After a strong start to 2019, cryptocurrencies continued their rebound throughout May. True, the major cryptocurrencies still have market caps significantly below where they were back in December 2017, which is contributing to a ‘base effect.’ Nevertheless, Bitcoin (BTCUSD) rallied by 62.2% in May, Ripple (XRPUSD) added 43.4%, Etherium (ETHUSD) gained 66.9%, and Litecoin (LTCUSD) added 56.1%.
The main factor for bullish crypto currency price action identified earlier this year, emerging market weakness, remains in the driver’s seat. It just appears that which emerging market currency (EM FX) is in the driver’s seat may have changed.
Why Does Crypto Benefit When EM FX Suffers?
A quick recap: bitcoin and cryptocurrencies are not “safe haven currencies” per se, as they lack key features of being a currency in the first place, main of which is a ‘stable store of value.’ But if you’re not using bitcoin and other cryptocurrencies as ‘stores of value,’ then, given the electronic nature of the globalized economy in 2019, the cryptocurrency market, coins and tokens can all be used as intermediaries to move capital beyond the reach of governmental agencies.
Why would a market participant want to move capital around without government interference? If capital controls are in place, then it may be impossible to render the production of goods or services at fair value, especially in an emerging market economy. It may not be due to domestic conditions alone, either fiscally (via elections) or monetarily (via central banking independence). Instead, it could be due to external factors, like economic fallout from an international trade war.
Bitcoin Driver Flips from Turkish Lira to Chinese Yuan
Per the Emerging Markets Crisis Monitor, central bank independence and governance free of political interference are critical features of long-term stability for EM FX. The encroachment by the Erdogan government on central bank independence and non-partisan governance have been contributing factors to weakness in the Turkish Lira this year.
Over the past six months, the correlation between the Turkish Lira (USDTRY) and Bitcoin (BTCUSD) has been very significant at 0.865. Even the three-month correlation remains strong at 0.77. But that relationship seemingly weakened in recent weeks: the one-month correlation has been a surprising -0.53.
Turkish Lira (USDTRY) vs Bitcoin (BTCUSD)Technical Analysis: Daily Chart (December 4, 2018 to June 4, 2019) (Chart 1)
So, while for most of 2019, while we’ve witnessed Bitcoin prices and the Turkish Lira have traded in a diametrically opposing fashion, this has not been the case of recent. But that doesn’t mean that the relationship between EM FX and cryptocurrency markets has changed in a material way; instead, Bitcoin, Ripple, Etherium, and Litecoin are looking to the world’s second largest economy for clues.
Chinese Yuan (USDCNH) vs Bitcoin (BTCUSD)Technical Analysis: Daily Chart (December 4, 2018 to June 4, 2019) (Chart 2)
The relationship between the Chinese Yuan (USDCNH) and Bitcoin (BTCUSD) has been much less significant than that between USDTRY and BTCUSD over the past six months; the former’s six-month correlation is 0.42 while the latter’s is 0.86.
But whereas the Turkish Lira has lost sway over Bitcoin over the past month, the Chinese Yuan has seen its influence grow considerably: the one-month correlation between USDCNH and BTCUSD is 0.84 and the three-month correlation is 0.92. In other words, since the start of March 2019, when the Chinese Yuan has weakened, Bitcoin has rallied.
EM FX and Cryptocurrency Relationship Conclusions
There is still no good reason to think that the strategy perspective initiated in early-April 2019 has been invalidated yet: what’s bad for EM FX – like the Chinese Yuan and Turkish Lira – is good for cryptocurrencies – like Bitcoin – in general. It still holds, then, if Bitcoin prices and the cryptocurrency market are going to continue their 2019 rally, the best bet may be for the US-China trade war to worsen or for Turkish credit risk to continue to rise.
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— Written by Christopher Vecchio, CFA, Senior Currency Strategist
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