Sugar has continued to trade at the top of its recent range for the last week. NY Sugar week is on and a few interesting (and very bullish) headlines have been emerging. The huge Brazil crop is well and truly known to the market so the market is looking to for new stories. The two main stories centre around the lack of rain in Asia. The biggest headline so far is that India’s replanting for next year will be as much 35% below this year’s level in Maharashtra. To realise the scale of this, note that Maharashtra produces as much cane as all of Thailand. As a consequence of this, India could be an importer of up to 6 mmt. Thai replanting is also being questioned with some talking a cane number of 85 mmt, way down from the 95 mmt this year and 113 mmt the year before. Also Chinese production has been pegged by some to fall with imports rising from 6m to 8 mmt within the next couple of years. Production is set to fall, according to these headlines to 8.5mmt down from 13.5mmt a couple of years ago.
Market consensus for these views is slightly higher production in Thailand and China with Indian production falling modestly and not enough to drawdown stocks significantly enough to import. These views are obviously very weather dependent, as we remember the worst drought in 80 years in Brazil with initial estimates of down to 540 mmt, became a 617 mmt crop with favourable conditions. But the headlines may well be enough to spark another push higher in the market.
The USD sell oﬀ is now well and truly over and recent comments from the FOMC suggests that a July interest rate hike could be back on the cards. There is perceived political risk around a June move with the Brexit vote coming on June 23rd. This is creating a large degree of uncertainty and any policy moves in front of it will require a larger degree of confidence than usual. A July hike from the Fed also has implications for the RBA. With a stronger USD (weaker AUD), the need for the RBA to cut again diminishes. The AUD/USD rate initially rallied as the RBA minutes suggested back to back hikes were oﬀ the table, but this rally was short lived, pushing lower with a more hawkish Fed.
AUD/USD spent a lot of time in a 68-74c range, and the move back into this range suggests a push down to 68 is more than possible. Whilst others have diﬀerent views, waiting for the CPI on July 27th makes sense for the RBA, so a follow up cut, if required would more likely be delivered in the August meeting.