USD MACRO CURRENCY UPDATE
The USD has continued to appreciate although with slowing momentum. The highlight of the week was the capitula on style move in USD/BRL trading from 3.06 to a high on 3.27 on Friday. AUD/USD moved lower in the beginning of the week, squeezed in the middle and it currently working at the bottom of the recent range. Key events this week are the RBA minutes which should leave the door open to further rate cuts should the economy continue to struggle; and the FOMC meeting in which it is widely expected the Fed will remove the word ‘patience’ from its statement, thus moving a step closer to the first rate hike (expected between June and September).
The Brazilian central bank is also widely expected to raise interest rates another half percent at the end of the month, keeping the currency under pressure. The government has also expressed a desire to let the currency find its own level, with interventionist policy being ruled out. It must be remembered that USD/BRL was trading at 4.00 in 2002. At those sort of levels, Brazilian producers can be selling production futures at 10c and still locking in sales 5+% over the cost of production.
Following on from the discussion last week, the sugar market has played out as expected. With the rising USD/BRL, producers were seen selling well under 13c basis July futures. This is letting them lock in levels significantly (15+%) above the cost of production.
There has been very little news of the current Thai crop, although we are hearing of higher ATR levels given the dry harvesting conditions. There have been rumours of a crop size as big as last year. Whilst we think that might be a bit overdone, there is certainly the potential for a few hundred thousand tonnes more sugar than the markets 10.1mmt consensus.
The Indian crop has progressed well this season, which production coming at the top end of the markets range. This has occurred against a backdrop of what was considered a ‘failed’ monsoon. The forecast for the coming monsoon is much better than last year.
Whilst we are trading at absolutely low levels in USD terms, in local terms (and sometimes with government help) producers are still being incentivised to plant more cane (or maximize the sugar mix). Higher prices seem either a long way oﬀ or dependent on a weather event.