Ag Markets July 27, 2020
/This is a big macro week for agriculture traders: Fed policy decision on Wednesday, the U.S. government working on more fiscal aid, weekly jobless claims data on Thursday, and earnings announcements from big tech names (GOOGL, AAPL, AMZN).
The macroeconomic environment has been a supportive trading input for agriculture futures over the past month, largely driven by a lower U.S. dollar and higher inflation expectations. The rosy macro mood (and great U.S. export sales) has thrown agriculture futures a lifeline during what is normally a seasonally bearish time of the year for grain and oilseed markets.
With Chinese trade war tensions re-emerging (Houston and Chengdu consulates closed) and risk assets lower on Thursday and Friday last week, the macro environment will again be an important x-factor for agriculture futures this week.
Hedge fund positioning is becoming more of a bearish trading input looking forward. This weekend's COT report showed a fourth consecutive week of fund inflows (mostly bean oil) and today funds are the longest they've been since mid-February.
Price seasonals remain firmly negative for grains and oilseed markets. Chicago wheat prices have dropped in 12 of the past 12 years over the seven weeks following July 31st (chart of the week below).
What Matters This Week:
Agriculture markets face two significant non-fundamental headwinds this week: price seasonals are negative and hedge funds have built vulnerable longer-than-average positions in markets like chicago wheat, soybeans, bean oil, canola seed, and arabica coffee.
The question for agriculture traders this week: Can the macro environment hold up ag markets against the weight of seasonals and structure? What if the dollar re-strengthens on better data, fewer Covid-19 deaths, flight-to-safety flows, or a hawkish Fed on Wednesday?
Watch this week:
Structure: How vulnerable are new fund long positions? Will bean oil prices drop after this past week's big inflows (as they have after 15 out of 19 past big inflow weeks since 2010?)
Seasonals: Will negative seasonals weigh on expensive and overbought markets like chicago wheat, soybeans, and bean oil?
Macro: How will the U.S. dollar react to this week's Fed policy decision, U.S. data, and U.S. fiscal stimulus announcements? Will a weaker U.S. dollar remain the only positive macro trading input for agriculture futures?
Chart of the Week: Chicago wheat prices have dropped in 12 of the past 12 years the seven weeks following July 31st (this Friday)…will this year be different?
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