Brazil’s Real, despite the US Dollar’s strength, rallies to the highest level in over a year to further erode Brazil’s agri-competitiveness.
The US Dollar rallied sharply on Friday night against the agri-exporter currencies. US employment grew strongly in July. Traders and investors were consequently more confident of both US economic strength and higher US interest rates and so bid the US Dollar higher. The greenback’s strength makes the other important currency story from the day – the Brazilian Real trading one-year plus highs – even more remarkable. The Real did wilt when the greenback surged but then recovered almost all the ground it lost. Currencies do not usually brush off big gains in the greenback like the Real did on Friday. Something to keep an eye on for sugar and oilseed markets in particular. The Australian Dollar very much followed the global pattern. The Aussie is half-cent lower this morning at 76¢.
Grains & Oilseeds
- Global wheat futures rallied sharply on Friday. Chicago September in particular surged to end the day with three percent gains – a rise that was out of character with the rest of the market. The contract did trade heavy volumes to make those gains. Still other US wheat futures made gains despite the US Dollar’s strength. While that is notable, prices are still not too far from season lows. In our view the most notable development on the day was the jump in the Kansas September-December spread. The spread has been stuck at lows for quite some as the futures shapes itself to carry surplus hard red winter wheat. The jump is just “one-from-one” and might simply be unwound. If the spread makes further gains though it could mean that the trade has managed to move the excess wheat forward in time. With the surplus can kicked sufficiently down the road we might just have seen a low in prices for the year.
- ASX East wheat futures weakened a couple of dollars on Friday. ASX East January fell near 3$ to close just above 242$/t. Global wheat prices and the Australian Dollar both moved helpfully on Friday night. The pair may provide the market with some support in initial trading today.
- Corn futures were modestly higher on Friday. Trade though is likely to remain very choppy as the market tentatively awaits US yield forecasts in Friday’s WASDE update. The market consensus is for slightly higher US yields compared to 2015. Some though are suggesting that, while rainfall has been above average in the Midwest, the hotter temperatures this year could temper crop prospects. Regardless, analysts are still looking for a modest increase in US corn inventories in this month’s WASDE report, with a small increase in global inventories too. Investors have also continued to build on their short position in the week to last Tuesday.
- Oilseed prices gained on Friday – canola modestly, soybeans strongly. Friday’s position report showed that investors continued to reduce their long positions in ‘beans in the week to last Tuesday. However since then the USDA has reported a string of large US soybean sales. Much tighter South American supply conditions has improved US demand prospects, which is now helping to offset worries over bumper US production. A sharply higher Brazilian Real lends further support to that view. The Real surged to the highest level in over a year on Friday and will consequently be approaching levels that force a repricing of US$ commodity benchmarks. The Canadian Loonie plunged on Friday too, which should be supportive of canola prices today.
US cotton futures continued to break higher in early Friday trade. Trader selling emerged after prices touched a high near 78¢ which saw the market pare some early gains. Spread action was also notable. The December-March spread narrowed, and briefly into backwardation, before deepening again to close at -19. The instability in the nearby spreads of late suggests the market is perhaps resolving some near-term physical supply issues. Analysts are expecting the USDA will again lower their estimates of world cotton inventories in Friday’s crop update. The USDA is likely to factor in dry US and Indian growing conditions and continued shrinking of Chinese cotton acres. Friday’s position report showed that investors have continued to build on an already large long positions.
Sugar futures prices surged again on Friday. The big jump in prices has extinguished any weakness in momentum for now. Trading was concentrated towards the end of the day but did have the clear signature of investors – others had a significant hand in the day. The market's gains were no doubt in part prompted by the rise in the Brazilian Real to the highest level in over a year. The timing of sugar’s surge does not match up exactly with the Real’s strength but looking for a tight correlation on Friday is to miss the point. The Real’s recovery in the face of greenback strength is remarkable and forced the sugar market to pay attention. For the record, prompt sugar was trading 10½¢ when the Real was last at this level. A near doubling of the price is perhaps a measure of just much the sugar market’s supply-demand balance has improved since that time. The argument is still about whether that whole extra ten cents is justified. Finally, while spreads were stronger, it was a nod in the direction of strength rather than the fulsome embrace by price levels.
The NZX WMP futures market’s upward momentum continued on Friday as prices closed strongly higher. A bitter cold snap over the weekend brought extensive snow to NZ’s South Island and central parts of the North Island.
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Important Disclosures and analyst certifications regarding subject companies are at www.research.commbank.com.au. This report was originally published, approved and distributed by Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945.