David Duong, CFA, Head of Institutional Research, provided a comprehensive analysis of the traditional and crypto markets in his weekly market commentary for the week ending August 4, 2023. According to Duong, the week was eventful for both markets, albeit for different reasons.

In traditional finance, the Bank of Japan’s decision to raise the hard cap on its 10-year bond yield caused a stir in currency markets. This move, which signaled a transition from its yield curve control policy, was seen by Duong as more than just a tweak but a significant policy shift. Despite this change, the Bank of Japan has been curbing sharp rises in the yield by offering to buy long-end Japanese government bonds (JGBs). This intervention has created instability across different pockets of the FX market.

In the US, the yield curve steepened significantly following the rally in Treasury bonds. This was due to the US Treasury Department’s announcement of an increase in the size of its debt issuance plans. Duong noted that while Fitch Ratings cut the US debt rating from AAA to AA+ due to concerns about the fiscal outlook, the impact on bond yields was fairly limited. He also pointed out that yields tend to track rate expectations more than supply pressures, making the ~25bp move in the US 10-year yield meaningful.

Turning to crypto, Duong highlighted that the US dollar is more sensitive to front-end rates, and the 2-year yield seems to be well anchored. He suggested that current macro conditions might lead to a temporary pause in the recent strong USD trend, which should be supportive for the digital asset market. However, he expressed concern that crypto performance may recouple with US equities in the short term, which may cap the upside on digital assets.

Duong also discussed the exploit of four liquidity pools on Curve, stating that while it didn’t help risk appetite in the crypto space, it didn’t sustainably accelerate the downtrend that’s been ongoing since mid-July. He argued that the actual systemic risk associated with the exploit is limited by mitigating factors that offset some vulnerabilities of the attack.

In terms of market activity, Duong reported that traders are taking a wait-and-see approach to the crypto markets. He also mentioned several potential upcoming catalysts for the crypto market, including the court decision in the Grayscale case, distributions from the Mt Gox Rehabilitation Trust to creditors, and any movement on the various bitcoin spot ETF applications in the US.

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