USD MACRO CURRENCY UPDATE:

The data in the US has continued to print strongly, with the latest non-farm payrolls exceeding all expectations printing close to +300k. This has primed expectation the Federal Reserve will remove the ‘patience’ comment in their statement when they meet on March 18th and will move to being data dependent for the next move in rates higher. This means, assuming the data continues to print strongly, the US will begin a hiking cycle some time between June and September this year. The USD has been stronger against most currencies for months now, but it is getting the additional support from higher bond yields.

On the other side of the equation is the Brazilian situation where the central bank is tightening policy (currently 12.75% with expectations of another 50bp hike on 29th April. Tightening into a slowing economy to stamp out inflation is usually a currency negative and this is no exception with USD/BRL moving from 2.60 to 3.12 in under six weeks.

AUD has been somewhat insulated from this despite our easing cycle. Twenty central banks have eased policy this year so we don’t really stand out. We continue to look for low 70s to lock in some hedges.

SUGAR UPDATE

Due to the significant move in the USD, it is much more appropriate to think about sugar in local currency terms. With the sugar curve in carry and very high positive interest rates a sugar producer in Brazil (with access to credit) is able to lock in a price of R$46.5c/lb. This is roughly 20% above the cost of production. Australia gets much less of this benefit as our interest rates are much lower (and the differential with the US is actually closing) Over two years (see graph), sugar is up 4% for Brazilian producers (yellow), down 5% for Australians (orange) and down 30% in USD terms (white). This is how important the currency effect has been.

In spite of the increased 27% blend, there are historically large ethanol stocks, so we expect the sugar mix to be increased this coming campaign. The monsoon rain in India appears to be on track following a poor(!) monsoon last year which has still led to a very large crop. The Thai crop continues strongly too, with longer terms expansion plans being noted. Whilst we see a strong USD (see graph for the correlation between sugar and USD/BRL) and the current strong dynamics in place, we see excess sugar continuing to be produced and barring a significant event which will destroy either sugar, elevation capacity or both, prices seem destined for much lower levels in USD terms.