Sugar continues to trade at the lower end of the longer term recent ranges, although a technical squeeze oﬀ contract lows has followed a one-year severe downtrend. The market is trying become more bullish, arguing large rainfall in Brazil will hamper harvesting and drought in Thailand will hamper additional cane acreage.
Volumes have been low for the last couple of weeks with producers standing aside waiting for better levels given the length of time to the October expiry and buyers not being in any hurry either. Given this environment, trading positions have been vulnerable to being squeezed out and this has occurred both in the flat price but also the VH spread. Oct/Mar has moved from –1.60 to –0.109 in two weeks. Given the perceived uncertainty around weather events, and the fear a large Asian trade house will again dominate the expiry, trading in both the flat price and spread is being driven more by flow and speculative positioning than macro themes.
Ethanol parity continues to fall given the continuing weakness in USD/BRL, but the market is currently more concerned about the availability of short-term cane. We are looking for this rally to sell production into either October or March, with a longer tail expected and hence lower prices by year end.
CURRENCY AND MACRO UPDATE
The Greece ‘No’ vote has been taken by the market in what could only be considered a very calm manner. There is still a way to go with this, but for AUD and sugar, this is looking like somewhat of a sideshow.
China, on the other hand is much more of a concern. Through expansionary policy and the opening up of the equity markets in HK, the Chinese equity market has rallied from 2000 to 5000. By any metric this is a massive move, but what has been more interesting is the reaction from the government to the falling market. After 150% up, a 25% pullback is usually not a big deal, yet the government has lowered interest rates, put a short-selling ban in place, created a ‘Ponzi’ type scheme to buy the market, halted IPOs and as at Wednesday morning, 45% of the market is in trading halt. This action seems out of all proportion for the magnitude of the move lower and suggests there might be other serious economic or market issues that have not come to light. Iron ore has fallen from 61.50 to 49.60 (23%) in seven days. This has put AUD/USD under pressure moving lower to the mid 74s. Our original target was slightly lower than here and we will be looking to lock some currency in going forward at these historically attractive levels.
With the general risk oﬀ environment, USD/BRL has rallied back towards 3.20 and a move to 3.30 seems on the cards now.