Sugar futures continued to fall in recent weeks, with the Mar17 contract now some 4 USc/lb lower than the high of 23.90 USc/lb seen on October 6. This move has seen the A$/tonne price correct to A$580 p/t at present.
The move lower in sugar prices is only partially explained by sugar fundamentals. A broadly stronger USD has taken the market by surprise post the US Federal election. Interest rates have jumped higher in the US in response to Trump’s election, with a wall of investor money into the US currency. This has seen a knee jerk liquidation of speculative longs in the sugar futures market, and a sharp weakening of the Brazilian real. The move in the USD is quite pervasive, and something financial markets have been looking for some time. Accordingly, markets are being decoupled from fundamentals and simply following the fate of a stronger USD. This theme will continue to provide a headwind for sugar prices in the short term.
Turning to sugar fundamentals, many analysts are now increasingly relaxed regarding the sugar balance heading into 2017/18, potentially ending the 2 season deficit cycle. Production levels are seen to be responding to higher prices, statistically taking us back into a small seasonal sugar surplus. With inventory drawdowns necessary to solve the trade flow deficit emerging in calendar year 2017, weather will remain a key variable as next season will commence with significantly lower stock levels. This alone should see sugar trade well above Brazilian ethanol parity, despite the more optimistic production outlook.
Short term , we see sugar prices finding support at the 18.50-20 USc/lb level as the Brazilian crush concludes, and we move into a period where very little fundamental news is available until Q1, 2017.
CURRENCY / MACRO COMMENTS :
The Australian dollar has also been sharply re-priced during the post-election USD buying frenzy. The currency had been threatening to move higher toward the US80 cent level recently, driven by fresh Chinese demand for coal and iron-ore, and a pause in any further interest rate cuts by the RBA.
We have now seen the AUD correct from just shy of 0.78 USD pre US election to 0.73 USD as the USD surged. Whilst a period of consolidation is now likely as markets digest recent volatility, the AUD will remain vulnerable in the short term. Looking ahead , we see any further weakness toward 0.70 USD as a as a buying opportunity for Australian exporters as local fundamentals continue to suggest the worst of the hangover from the mining boom crash is now behind us, and RBA is now likely to raise rates later in 2017.