Performance has been be led by sugar and coffee which have both recovered strongly after hitting a 10-year and a 12-year low last month. The 25% rally from the lows in both came following months of selling. With Brazil being a major producer of these two commodities, the weakness in the Brazilian real in recent months was the main driver behind the continued weakness which helped attract some aggressive short-selling by hedge funds, especially in coffee.
Apart from the general dollar strength against emerging market currencies this year the Brazilian real sold off and reached a record low ahead of October 7 when the first round of the general elections to elect the president, vice president and the national congress was held. The real recovered strongly once it became clear that Jair Bolsonaro, a market friendly candidate from the Social Liberal Party, was on track to win the first round. He will now face Fernando Haddad, the Worker’s Party candidate, in the run-off on October 28.
The reason why both coffee and sugar reacted so strongly to the recovering real was due to a major buildup in hedge funds' short positions. Once the technical and to a certain extent the fundamental outlook began to turn more favourably they were forced to reduce their short positions and the rally took off.
While coffee fundamentals would argue against a major price extension to the upside, sugar may find more support. India has in recent months signalled its intent to allow an increase in exports to support sugar mills under pressure from high stock levels and low prices. However, following the major price jump the urgency to boost exports may have lessened. In addition, a change in government policies on gasoline pricing in Brazil, the world’s largest consumer of sugar cane towards ethanol production, have made the cane-based fuel more competitive.