SUGAR UPDATE

As we have been talking about for a while now, the market is caught between tight supply in Asia balanced against a perceived record crop in brazil. The upcoming deficit has been well flagged but a general push back into commodities has given the spec community the confidence to move to a record long position. No sooner had that long been established, the market ‘washed out’ 80 points lower. Volumes are lower than usual, and “air pockets” where buying and selling order cause the market to gap to a new level are becoming the new normal.

What can get us out of this paradigm? It could well be argued that the deficit is already in the price, but a crop shock from here could push the market to a new higher level. The deficit is real, as is the lack of rain in India and Thailand. Crops can recover more quickly than the market gives them credit for … remember last year Brazil went through the worst drought in 80 years and some were calling for the crop to be 520–540 mmt. The crop ended up at 617 mmt. The weather has remained hot (although slightly less so this week) and dry in Asia.

Until we get either the crop shock to break us to the upside, or the rain in Asia to help plug the following years deficit, the market is expected to wax and wane as people guess which way the market is going to break.

CURRENCY/MACRO COMMENTS

As noted last week, the RBA cut interest rates, and the Statement of Monetary Policy released on Friday let everyone know why. The RBA (like many central banks) has an inflation mandate. This means they will adjust policy so on a two-year view inflation will be sitting within a 2–3% range. The new forecasts released on Friday showed that the RBA is now reliant on a lower currency to generate inflation, and even then they will struggle to get inflation back into the band within two years. Another cut seems very much on the radar now, the only issue is how the housing market will react. Interestingly, the RBA weighed into the negative gearing debate, suggesting a grandfathering of existing deals would only have a small affect on the total market.

The iron ore market is China appears to be the latest speculative bubble. The Dalian Exchange was trading more iron ore per day than China imported every year. An increase in margin fees was all it took to push the price from $70/t to $55/t. It appears now more likely the increase in iron ore price was due to hot money than an increase in Chinese demand. This will take a little of the buying pressure out of the AUD and give relief to the RBA.