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Liquidity Watch: The $ liquidity outlook remains solid for Q3

We are not miles from the needed threshold level of USD reserves in the system and the Fed is aware of that. This is a strong reason to believe that liquidity conditions will remain benign from here on a trend basis.
2024-06-20


The liquidity outlook always makes for interesting discussions and after a few minor hiccups in liquidity proxies both in the USD space and the GBP space, we are getting increasingly cautious central bank behavior to see in the liquidity space. We therefore see generally benign liquidity conditions ahead for H2-2024 in sharp contrast to predictions from the nay-sayers!

Let’s have a look at the details.

Liquidity conditions have generally improved since the drawdown during tax season in April/May and we are trending higher now. We have seen how repo markets have reacted to the tightness in liquidity in Q4-2023 and very shortly during the tax season in April again, meaning that we are not kilometers from the lower threshold of needed liquidity for private repo markets to clear without sudden spikes.

With QE-light conditions prevailing on a trend basis from here, we should stay a few hundred billions away from the danger-zone for private repo markets over the summer.

Chart 1a: Liquidity has improved since the weakness during tax season

We are not miles from the needed threshold level of USD reserves in the system and the Fed is aware of that. This is a strong reason to believe that liquidity conditions will remain benign from here on a trend basis.

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