USD/MACRO CURRENCY UPDATE:
Sideways price action has dominated the USD in the moves since the Easter break. The market is receiving very mixed signals from the Federal reserve with Governor Lacker calling for the first interest rate hike in June 2015, while Governor Kocherlakota is suggesting they should wait until the second half of next year. This sort of uncertainty would suggest the USD will struggle for conviction, either up or down.
Elsewhere, the story is diﬀerent. The European Central Bank meets Thursday this week and is expected to reaﬃrm its commitment to purchasing Eur60b of securities per month under its QE program. The Bank of Japan is likely to acknowledge their 2% inflation target commitment will not be met either. The Australian Treasurer is looking to lower the forecast price of Iron Ore to USD35/t, hence creating a large deterioration in the country’s fiscal position. Brazilian inflation, year on year, at 8.13% is well above the top of the central bank’s band (6%). This suggests further hikes at the end of the month and a continued weaker currency.
Whilst the USD on its own may be ‘middle of the range’, there are good reasons elsewhere across the globe to think the USD uptrend will resume following the most recent pause.
The sugar market has been very active since the Easter break with prices moving higher, especially at the front of the curve. Similarly to Mar/May the May/July spread has been caught up with players creating a short squeeze and the market has inverted (May is above July). This rally has coincided with the ‘spec’ community establishing a record short position of 133k lots, but also with a 10% fall in USD/BRL from 3.30 to 3.02.
The May contract expires at the end of the month and has somewhat ‘detached’ from the rest of the curve due to positioning. A clearer read of the overall market is looking at the July contract. It has tested 1300 and failed to hold. Whilst there is some influence still being felt through the May/July spread we feel there is not too much upside from current levels assuming USD/BRL holds over 3.00 (it is currently 3.12).
The crop estimates for Brazil are coming in roughly around the same as last year (580 mmt), although we are seeing strong hydrous ethanol demand. Rain is likely to delay the start of the harvest, then all eyes will be on the mix, ATR and ethanol parity. At this stage we are using any in sugar rallies to sell.