The dynamics of the sugar market have done a complete about face since the end of September. The market is up seven weeks in a row, with spot prices now sitting mid 15 cents. Whilst the macro background has certainly become more positive, most recent price action is more indicative of traders’ positions being squeezed out rather than a belief that we are back on the way to 20c.
The bullish arguments are, rain in Brazil will interrupt the harvest, Chinese, Thai and Indian production will all be lower against consumption, which continues to rise. This argument doesn’t take into account current stockpiles, which have been such a focus on the way down, nor the fact cash premiums are not following this move higher. In other words, end users (who purchased a lot in the third quarter this year) aren’t hitting the panic button to purchase. Which leaves waiting and watching to see the final bit of capitulation for the end stage of this rally. The curve has moved into a 70-point inverse for the 2016 year, a sign that the buying is more speculative in nature.
Brazilian producers with access to credit have been able to forward sell at levels vastly over their cost of production. We will be watching closely for signs of increased husbandry, mill investment and M&A activity in the sector. The sector is ripe for rationalisation.
GLOBAL MACRO UPDATE
The RBA stayed on hold at the November board meeting, although have noted inflation is towards the bottom end of the band. This leaves them the scope to cut at future meetings, although with the currency having stayed in the low 70s and business investment increasing, banks hiking rates and the housing market cooling in Sydney and Melbourne, until activity moves lower, the bank will be happy to sit on its hands.
The FED at its last FOMC meeting left the door open for a rate hike in December (17th), although this could be as much trying to keep some two way thought in the market as an actual belief that they will be hiking. Payrolls on Friday will be important with an above consensus number most likely leading to the market pricing a hike at either the Dec or Mar meeting.
Chinese data (whilst stabilising) continues to be soft, and the PBOC has cut rates for the sixth time this year as well as lowered the capital required for banks to hold (RRR). With iron ore stockpiles at ports at six-month highs, this suggests AUD will remain oﬀered into any rally.