5 April 2016

Weekly Market Report 5 April 2016

SUGAR UPDATE

The speculative and fund community caught the market by surprise over the weekend, with what was expected to be a reduction in their long position (into the 68 point fall last Tuesday) actually was an increase. It now appears more and more likely this is where the majority of the move up from 12.50 has come from. So where to now? Prices have washed out from 16.77 to 14.62 in the space of a week. But the long position of this sector is still very large by historical standards. Could they go to all the way to neutral or even short?

From an upcoming crop the weather in Brazil looks positive and ethanol prices have collapsed, making sugar more attractive to producers. There are also lots of rumours floating around about a lowering of the mandated gas price (remembering the increase in gas price last year set the industry up for much higher production at the cost of cane, hence supporting the sugar price). With the weakening of EL Nino, the Indian body ISMA, is now projecting a more normal monsoon.

On the positive side, the drought in Thailand continues unabated. USD/BRL has also come well off the 4.25 highs in spite of the politics in Brazil continuing to deteriorate. Commercials and producers have been able to sell into this rally so at some point buying will emerge to halt or slow any further speculative / fund selling.

CURRENCY / MACRO COMMENTS

As we have spoken about previously, you can’t depreciate your currency when everyone else is trying to do the same thing. The exception to this rule is when the macro is overwhelming such as we saw in Brazil last year. That is, unless there is a big change in fundamentals, base case is the currency market is sideway until further notice.

AUD/USD has tracked higher as commodity prices have stabilised, but fundamentally the only thing that has changed in the last couple of months is the commentary from Fed Chairman Yellen has been less USD supportive than the market has been expecting and long USD positions have been washed out. The market is now pricing nearly two hikes from the Fed this year and that seems about right. The market is expecting nothing from the RBA for the next six months. If the Big Four banks were to start to raise rates for margin protection or the currency was to push up closer to 80c without the corresponding move up in iron ore and other commodities the RBA could be called back into action and cut. This is worth watching for. The RBA will start jawboning the currency well before they would look to cut.