Hedge funds are trimming risk and liquidating recently-added long positions in the face of a worsening macroeconomic environment (broad risk-off trading, US dollar stronger) and ahead of negative February price seasonals.

Last week we saw the macroeconomic mood worsen on coronavirus headlines, driving the US dollar up and stock markets, energy markets and inflation expectations down. We're starting this week with a similar negative tone. This week's scheduled macro events include a U.S. Fed policy decision Wednesday (no policy change expected for all of 2020) followed by U.S. 4Q GDP and a Bank of England policy decision Thursday (possible interest rate cut).

Price seasonals turn more negative as we get into February. This week we enter the most negative multi-month periods of the year for a few major agriculture futures markets (many of which are currently expensive and overbought vs data the past 24 months). Our seasonal heat maps have a lot more red looking forward.

Market structure still looks like a bearish input. Hedge funds are around the longest they've been in ag futures since June '18. Funds are especially long in markets like sugar #11, white sugar (record long), chicago wheat (record gross long leg), arabica coffee, bean oil, cocoa, and matif rapeseed (record long).

What Matters This Week:

We see some bearish non-fundamental factor alignment building across our markets with the macro environment downgraded to negative, market structure bearish (funds broadly long), and seasonals turning more negative over the coming weeks.

The macro environment will remain the most fluid non-fundamental driver and is a headwind for agriculture prices coming into this week. Along with coronavirus headlines, watch the Fed announcement Wednesday at 20:00 GVA, 1:00pm Chicago and the BoE announcement Thursday at 13:00 GVA, 6:00am Chicago. The Fed will likely be a non-event but a dovish BoE (e.g. rate cut) would drive USD up and our agriculture markets lower.

Chart of the week: The US dollar has strengthened +1.5% in January and is getting a flight-to-safety bid coming into this week. A stronger US dollar has been a big headwind for agriculture futures over the past two years. This week’s U.S. Fed decision, U.S. GDP, and BoE rate decision are the next USD catalysts.

For a trial of our industry-leading agriculture research, reach out to us: insight@peaktradingresearch.com.