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Morning markets: Ags extend recovery, as dollar prolongs decline

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The dollar extended its decline early deals on Thursday.


And that was pretty much all investors in commodities needed to know, given that a weaker greenback boosts the affordability of dollar-denominated assets, which includes many major raw materials.


As Benson Quinn Commodities noted, “the weak US dollar supports export demand but more importantly supports the broad dollar based raw commodity market”.


The greenback slide even “could shift capital for equities into ‘cheap’ commodities”, realising some of that optimism for raw material prices around earlier in the year.


This was optimism, it has to be said, which was based in part on ideas that the dollar might fall, although whether it as expected to decline so far quickly…


The greenback is now down 3.5% against a basket of currencies so far in 2018, to its lowest levels since late 2014.


‘Drastically oversold’


Early Thursday’s dollar dip was not huge by recent standards, easing a further 0.3% to below 89.1 on its trade-weighted index.


Still, any decline at all surprised some observers, who had mused whether the greenback would be poised for a recovery, with one broker, for instance, terming the currency “drastically oversold”.


One issue seems to be the phlegmatism with which Steven Mnuchin, the US Treasury secretary, reacted on Wednesday to the dollar sell-off, telling the World Economic Forum in Davos: “A weaker dollar is good for us as it relates to trade and opportunities.”


He added: “Longer term, the strength of the dollar is a reflection of the strength of the US economy and that it is, and will continue to be, the primary reserve currency.”


Index gains


With the dollar continuing to slip, the headline Bcom commodities index added 0.3% to set its highest levels since late 2015.


The agricultural commodity subindex gained 0.3% to a little over 47.8, putting a bit more distance between it and the all-time low of 46.5998 set last week.


Indeed, ag price gains were not huge in early deals, in line with the modest further decline in the dollar.


Cotton eases


Nor was headway universal, with cotton for March, for instance, easing by 0.02 cents to 82.25 cents a pound in New York as of 10:00 UK time (04:00 Chicago time) - a small move, but one which left it below its 10-day moving average, below which the contract has not closed for more than two weeks.


The decline came as China unveiled some somewhat downbeat cotton import data for December, at 100,415 tonnes, down 30% year on year - albeit at the close of a solid 2017, for which imports overall gained 29% to 1.16m tonnes.


There is plenty of talk of closing by funds of some of their record net long position (ie profit taking) in cotton, with Ecom for instance noting “apparent speculative long liquidation” in the last session.


The trading house also noted that “the big freeze and hurricane events have damaged US cotton quality grades forcing buyers to pay up in order to get producers to part with better quality cotton”.


Chart ceiling?


Even among grains, Chicago corn was notably reluctant to rise too much further, having in the last session bust above its recent trading range to a level just short of its 100-day moving average, which looks like it may prove a bit of a hurdle to further upward movement.


Still, there was some fundamental cause for buyers to cling on to, with US Department of Agriculture staff in Buenos Aires overnight issuing an estimate for the Argentine corn crop of 40.0m tonnes – 2.0m tonnes below the official USDA figure.


Then, Chinese import data came in OK too, at 454,151 tonnes for December, more than treble volumes for the last month of 2016, and reducing to 10.8% the slip for 2017 as a whole, to 2.83m tonnes.


In fact, Terry Reilly at Futures International said that technical resistance for the March contract “is seen at its 100-day moving average of $3.58 a bushel, and the contract could easily trade there on a bullish export figure”, say, when the US issues its weekly ag trade report, delayed a day to Friday.


The contract in early deals stood up 0.1% at $3.56 ¾ a bushel.


‘Cold snap ahead’


Fellow grain wheat fared a touch better, adding 0.3% to $4.34 ¼ a bushel in Chicago for March delivery, with the Kansas City hard red winter wheat March contract in lockstep.


The gains came despite an estimate of 18.0m tonnes by USDA’s Buenos Aires bureau for the Argentine wheat crop - 500,000 tonnes ahead of the official USDA figure.


Still, on the more positive side for prices, analysts at NCML forecast this year’s India wheat crop at 96.1m tonnes, “down 2% from 2017, and well below the government estimate of 100m tonnes,” Futures international’s Terry Reilly noted.


He also flagged that “traders are concerned over winterkill threat for the lower US hard red winter wheat country in early February when a cold snap blankets the central US”.


Soy gains


Chicago soybean futures for March added 0.3% to $9.95 ¼ a bushel, amdi continued worries over Argentine dryness, which helped soymeal for March gain 0.3% too, to $342.90 a short ton.


(Argentina is the top soymeal exporter.)


Benson Quinn Commodities noted that a firmer real, boosted by both dollar weakness and the rejection of an appeal by former president Lula against a corruption conviction, had “halted Brazilian producer selling” of soybeans in teh last session.


(A firmer real lowers the value in local terms of assets priced internationally in dollars.)


In fact, the currency move “has been slowing new crop selling over the past month with the real up 5.7% for the year so far”, the broker said.

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