Ag Markets August 3, 2020
/What's the most bullish non-fundamental driver for agriculture markets this week?
U.S. dollar weakness. The U.S. dollar returned -4.2% in July, its worst month since April 2011. This USD weakness has been a powerful positive lever for agriculture futures and commodities broadly.
Why has the U.S. dollar weakened so much?
The U.S. has a higher rate of Covid-19 cases/deaths versus other major currency nations, which will keep U.S. interest rates low and keep Fed stimulus pumping, a negative driver for USD.
What's the most bearish non-fundamental driver for agriculture markets this week?
There are two big ones: Fund positioning and price seasonals.
Fund positioning: Hedge funds have been on a buying spree in agriculture futures over the past six weeks and today:
Non-commercial traders are the longest they've been since late Jan.
Momentum CTAs (~25% of funds) are the longest they've been since mid-Jan.
Hedge funds have less buying firepower looking forward, especially in broadly overbought markets like soybeans, bean oil, sugar no. 11, canola seed, feeder cattle, and arabica coffee.
Price seasonals: negative for grains, meats, sugar, and arabica coffee.
The annual low for corn is Aug 29th, chicago wheat Sep 2nd, soybeans Sep 27th. We're in the fourth quarter of the ag complex downdraft that runs from June 1st to Oct 1st.
What's on the macroeconomic calendar this week?
Monday: U.S. ISM manufacturing data, Tyson earnings.
Tuesday: U.S. durable goods data, BP earnings.
Wednesday: Brazil interest rate decision, ADP jobs (private survey preview of NFP jobs)
Thursday: Glencore earnings, jobless claims data (last week showed a second consecutive *increase* and the biggest jump in continuing claims since May), BOE rate decision.
Friday: Monthly U.S. nonfarm payrolls data, exp. +1.6mm jobs, unemployment ~10.5%.
What matters most for agriculture futures this week?
The U.S. dollar's next move matters for ags. A weaker U.S. dollar has been the #1 positive macro driver for agriculture markets over the past month. Hedge funds have bought futures and prices have risen. These new longs will look vulnerable if the U.S. dollar re-strengthens.
What macro catalysts could make the U.S. dollar strengthen?
#1 Better U.S. data. Lower jobless claims Thursday and better NFP jobs Friday would boost USD.
#2 U.S. Covid-19 cases and deaths dropping. U.S. cases down = USD up.
#3 Dovish non-U.S. central banks, e.g. if Brazil cuts rates on Wednesday
And if USD strengthens, ags will go down?
That's very likely. USD up = ags down...especially against the backdrop of newly added hedge fund longs and broadly negative price seasonals. A weaker USD propped up our markets in July (chart of the week below). Watch USD closely this week - especially around this week's jobs data and central bank decisions.
Chart of the Week: U.S. dollar weakness is a powerful positive lever for commodities broadly. USD just had its worst month since April 2011 and 20 out of 26 agriculture futures markets finished the month higher.
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