SUGAR UPDATE

The sugar market is currently the subject to two very different influences that are both fighting for overall control. On one hand, global commodities are rallying due to optimism in Chinese policy and the belief that the Fed will maintain interest rates at a low enough level to allow growth whilst having the cost of money virtually free. This has led to a “risk asset” rally—equity markets, commodities and commodity currencies (AUD, CAD, NZD) have all benefitted. Added to this, the sugar market is looking at a large deficit for this year as well as a potential deficit for next year.

On the other side, the Brazil crop now has estimates as high as 644mmt of cane for this season and the Indian monsoon is now predicted to be 109% of the long-term average. This medium term (over) supply is keeping a good section of the market bearish. There is also some talk around (take with a grain of salt at this point) El Nino is moving into a La Nina, which tends to bring rain to the parts of Asia that need it as well as keeps Brazil dry when it needs it.

The spec position has maintained around the long 200k, but new money flowing into commodities may well take us higher. The fundamentals are now more bullish than they have been in the last couple of years but the question that must be asked given the bearish factors out there: “We are up 55% off the lows; how much is already in the price?”

CURRENCY / MACRO COMMENTS :

As noted, the macro markets have adopted a “risk on” mantra over the last week. Equities, commodities and commodity currencies have all rallied. The data in Australia has been on balance supportive, and whilst the market is still pricing easings for this year, it’s hard to see the RBA cutting rates into unemployment that is falling and a perceived increase in Chinese demand leading to higher commodity prices (terms of trade improvement). Technically, the break of 7730 opens to door for AUD to track through to 80c.

The buoyant equity market also keeps the door open for the fed to continue to tighten rates. Initially the market was looking for four hikes for this year and has been pushed back to two. The market is assuming this rate of increase will be supportive enough for higher asset prices to prevail. Any sign of inflation and the Fed will be forced to move more quickly, but that isn’t in the here and now. USD/BRL has fallen 70 big figures into the impending (and now realised) impeachment of the President. Buy the rumour, sell the fact comes to mind here with again the question being asked, “how much is in the price now?”. We look for USD/BRL to resume the move higher shortly.