Westpac: Liquidity Conditions Have Deteriorated Since November

Westpac have “looked at the median of the top of book bid sizes in XM futures over each 10-minute period per day since early 2018. We have only previously seen the current level of illiquidity in March 2020, at the onset of the COVID pandemic, and March 2021 where liquidity collapsed for a short while. It is also interesting to note that this is the longest time we have seen such low liquidity conditions persist. The deterioration of liquidity began in November, when the RBA stopped its Yield Curve control amidst significant volatility. Additionally, given the geopolitical tensions between Russia and Ukraine which escalated into a war, and the extreme pre-emptiveness of the market versus the RBA’s dovish messaging, it is perhaps not surprising that a number of market participants have reduced their risk at this current time. We can also see that the market continues to be vulnerable around the futures expiry periods, though we know that is not the only factor contributing to falling liquidity. Indeed, we don’t see liquidity improving until the market feels like it’s better placed to put on risk again, perhaps not until the first RBA hike.”