The end of yen arbitrage, can the crypto market survive the crisis?

Author: Rob Hadick Source: X, @HadickM Translation: Shan Ouba, Golden Finance

Macroeconomic Analysis

This broad sell-off is mainly related to the deleveraging event of a large number of cheap leverage transactions in the yen and the broader yen carry trade. With the yen rising more than 10% against the dollar and the Nikkei falling more than 20% over the same period, this process seems to be nearing its end.

Nevertheless, we still need to be cautious because of the possible contagion effects associated with the above situation, but Japan may take higher financial intervention measures to offset some of the risks.

The 2-year yield clearly shows that the market is worried that the Fed is behind the curve after a bad employment report on Friday and a lot of previous revisions, but many details in the report indicate that such concerns may be exaggerated, with many of the temporary layoffs and unemployment claims related to weather conditions in Texas. The trend is not positive, but the specifics have eased somewhat, and historical labor levels remain strong. The ISM manufacturing data miss is also related to unease, but the trend has been there, and the services sector is more important, and we will see the results today, and I am cautiously optimistic about it.

The consumer still looks relatively strong, with strong retail purchases in the second quarter and the ratio of credit card balances to income still at historically normal levels.

There is a reassessment of the returns on AI-related capital expenditures, which is resetting growth expectations for large technology stocks, but most smart money on Wall Street believes that these concerns are oversold and should not have a broad market contagion effect. These stocks are expected to rebound strongly once the environment becomes more risk-free.

The VIX and Fear and Greed Index have soared, and there may be a lot of volatility in the short term, and August is historically a low liquidity month, but if we see the VIX turn around and get a more solid footing this week or around the Jackson Hole meeting, the risk reward may enter a nice range.

The market is pricing in an emergency rate cut, which I think is unlikely to happen and will prolong the fear until the Jackson Hole meeting. Hopefully I am wrong.

Iran appears to be backing off its most destructive rhetoric and we should be able to avoid any large scale conflict.

We could be in a few months (less than a year) for new QE, big rate cuts, an eventual return to accelerated business cycle growth, etc.

Overall this means some pain in the short term but a bullish outlook in the medium to long term.

Crypto Market Analysis

There has been a lot of endogenous bearish events in crypto lately, the German sell-off, the Mt. Gox distribution, the Jump shock to the market, etc. and we have been relatively strong up until now.

This looks like capitulation so expect us to bottom soon, possibly slightly ahead of the macro market. The decline from here will be driven primarily by macro and leverage specific factors.

Non-local retailers will not enter the market for a long time, too much pain is needed and we need sustained growth again for this to happen.

The market is bullish and we are looking at a lot of bearish news in the short term.

This is looking ...Non-local retailers will not enter the market for a long time, too much pain is needed and we need sustained growth again for this to happen.

Non-local retailers will not enter the market for Local retailers are overleveraged on long-term assets and have been bled dry over the past few months, with most "high-quality" memecoins and altcoins down 70% or more from their highs.

Thus, the returning liquidity will likely be concentrated in the majors. Most altcoins will never reach (or come close to) ATHs, especially without strong product-market fit or long-term expectations.

Overall, there is still a lot to be optimistic about in the long term, and beyond business cycle/macro factors, we have products that can reach a wider investor base, banks selling these products, widespread tokenization, PMF growth in crypto-related payments and stablecoin usage, a relative increase in DeFi activity, professionalization of traditional financial markets, and a wider acceptance of decentralized and open source systems as a solution to many inefficiencies in our current tech stack and financial markets.