SUGAR MARKET OVERVIEW

In a holiday-shortened week, Sugar continued its slide lower. “Technical” buying (read: short squeeze) on Tuesday gave way to three solid days of selling, with October finishing the week on new contract lows at 15.00c. The Oct/Mar spread weakened to –2.23.

We note a few (bullish) changes in market dynamics: Brazil physical premiums have rallied back to positive; ethanol parity is creating washouts; Oct/Mar spread has widened enough to facilitate a profitable roll for those able; Oct/Dec whites premium is very profitable at 102 for remelting and Oct flat price is at a low enough level to facilitate trade.

Whilst acknowledging Oct could continue a little lower, the risk reward of holding a short position no longer stacks up so we have moved back to a benchmark position. Longer term, issues of the damage from the Brazilian drought and flooding in India still remain but with the market in steep carry and excess production being rolled forward, at least some of these risks are in the price.

CURRENCY MARKET OVERVIEW

The AUD continues to trade within a 9200–9500 range with very low volatility. With the ECB accounting QE, EUR, GBP and JPY all sold off as the USD rallied across the board . The exception to this was AUD which found buying against EUR selling. Dairy prices continue to weigh on NZD, yet iron ore making 5 year lows to 83.60 are not affecting AUD.

The two key data points this week should both “revert” back from outliers seen last month. The unemployment rate was probably too high at 6.4% and the NAB confidence number was also too high at +8. There are plenty of reasons why AUD/USD should be moving lower, but these have all been in place for a while now, and no obvious near-term catalyst exists for a break of this current range. That said, if we were to get a break to the downside, it is expected market participants would add to current shorts looking for AUD/USD to play “catch up” to other G20 currencies that are already moving lower.