The sugar market seems (once again) to be trapped in a range. This time however the range is significantly higher than the lows and there are reasons to suggest we may continue to move higher. The new range is 13.70 to 15.50 with end users seen buying before 14c and producers selling over 15.25. Like most other times there are competing forces. On the bullish side, rain is threatening to hamper what remains of the Brazilian crop. Sugar production seems set to end around 30.5mmt down from earlier es mates of 32mmt. European production looks set to fall as does Chinese production. On the bearish side, this rain in Brazil will add to what appears to be a large amount of available cane (630 mmt+) and now the Bihar elections are over in India, the thinly veiled export subsidy (producer subsidy for mills who have exported 80% of their quota) can move into reality. Realistically, this subsidy has the potential to add 2–2.5mmt to the world market, but that will be fluid depending on the reaction of the domestic price to less supply. The higher the domestic price, the more sugar can be economically exported at a given world price.
The spec community has maintained its large long position. Whilst a break of this range will occur, trading in the middle is being dominated by computers and short term traders. Larger participants will wait for either the extremes of the range of a break to re enter the market.
GLOBAL MACRO UPDATE
Just as sugar, the AUD/USD is subject to contradictory forces. Commodities are under pressure with (West Texas) oil trading down to $40/bbl. Spot iron ore has rejected prices above $50 and is back at $47.This has added pressure to commodity currencies and kept AUD under pressure. As we noted last week, the CPI was getting to uncomfortable levels for the RBA and the interest rate markets started to price in cuts in the coming months. Whether you believe the ABS Employment Survey or not, the number was strong in every aspect and even the most ardent of ‘dovish’ economists has had their conviction dented for the next rate move. As it stands the market is pricing no moves this year or for the majority of next year and that seems appropriate at this point. Given the price action following the employment data a move to test the bottom of the range seems on the cards now. The squeeze after the number ran out of steam very quickly and we reversed lower.
We are still waiting for more clarity from the Fed on rates policy. The market will be keenly watching the next NFP and Fed speakers for clues. There are many reasons why they could stay put as well as why they will hike. Market pricing and positioning is reflecting this too.