SUGAR MARKET UPDATE
March 15 sugar squeezed higher last Tuesday in what appears to have been just stop loss buying. The rally continued slightly further on Wednesday, and fell away to have all the gains for the week, erased by Monday night this week. Volumes have been moderate (at best).
As we have mentioned before, producers are not in a hurry to sell given the length of the contract and consumers are looking at the fundamental backdrop of a stronger USD/BRL, a larger Indian Crop and rain in Brazil and are letting the market come to them.
The chart below is sugar in Reais/lb going back to 2012. In spite of the futures market trading near contract lows the eﬀect of the currency is dramatic. As noted by a market commentator over the weekend, if Brazilians are able to hedge production out to next year they are able to lock a price in around 50% over cost of production. As we have been saying for a while now, given the USD move and fundamental backdrop we find it hard to see where significant upside can come from without a significant external event in the foreseeable future.
The currency market has shown some large divergence over the last week. USD/JPY and USD/BRL have rallied to levels not seen for many years. AUD/USD on the other hand failed to push through the .8550 lows and staged a modest rally back to 88c. This rally failed overnight. There has been some chatter about the adoption of macro prudential policies to cool the overheated housing markets of Sydney and Melbourne. This move is slated before the end of the year, and will give the RBA some breathing room with respect to lifting rates.
The Japanese economy has entered a recession. The ECB is talking about buying sovereign bonds. This just suggests the USD move higher is set continue. Markets rarely adjust to new paradigms without corrections, so it may well be a bumpy road. We continue to look for AUD to move to the mid to low 80s.