Ag Markets May 18, 2020
/Agriculture markets see mixed non-fundamental signals coming into this week.
Price seasonals and hedge fund positioning are positive trading inputs, but a persistently strong U.S. dollar (especially vs BRL and CNY) is keeping a lid on our markets.
This week:
Price Seasonals: We're still in the most seasonally bullish weeks of the year for corn, chicago wheat, and soybean meal. This is the time of year when traders typically add a price risk premium to futures ahead of the big U.S. production months.
Macro: Crude oil breaking higher is a broadly positive input for agriculture futures, but the U.S. dollar remains stubbornly strong. Fed Chairman Powell testifies before the Senate Banking Committee starting Tuesday morning at 10am EDT with a message along the lines of "this recovery will take a while, the Fed is *not* considering negative rates but has plenty of other tools, more fiscal stimulus would help." We'll also see weekly U.S. jobless claims (exp. +2.5mm) and Philly Fed Thursday. China's annual NPC meetings kick off on Friday.
Market Structure: This weekend's COT positioning report showed small fund inflows, some surprise selling in corn, and a record net short position in spring wheat. Fund positioning is a bullish trading input for stretched-short markets like spring wheat, corn, cattle, and feeder cattle.
Momentum traders: Like the broader market structure picture (which includes all hedge funds, including momentum CTA traders), momentum traders have big short positions in a few markets like corn and spring wheat.
What Matters This Week:
The U.S. dollar is an important x-factor for our markets this week.
Seasonals are positive, market structure is supportive (esp for oversold markets like corn and spring wheat), and the rally in crude oil is a big boost for agriculture futures.
The U.S. dollar is up ~1.5% in May; if USD gives back some ground, that would make the macro environment more of a bullish trading input and we'd have some positive factor alignment from macro + seasonals + market structure.
To put it another way - what would be the most bullish combination of non-fundamental factors for ag markets this week?
Crude oil continuing to rally, a weaker U.S. dollar (watch Powell's testimony tomorrow), plus some seasonal spark that drives prices higher and triggers a short-covering wave in markets like corn and spring wheat.
Watch this week:
Any U.S. weather catalyst that gives May price seasonals some traction.
Price action in crude oil, esp for energy-linked markets like corn, bean oil, palm oil, and sugar.
How the macro environment reacts to Powell's testimony tomorrow and U.S. data Thursday; a weaker U.S. dollar would be a big boost for ag markets this week.
Chart of the Week: A structurally strong U.S. dollar has been a headwind for agriculture futures over the past year and the dollar’s +1.5% rally this month has blunted the positive impact from stronger energy markets (crude oil +23% in May) and improved risk sentiment (S&P 500 up, VIX down).
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