Saxo News & Research - Trade Views

Topics: Trade View Forex GBP GBPUSD Brexit

Wed, 06 Mar 2019 14:15:00 Z

A significant speculative short-covering potential has emerged in cotton after hedge funds have driven the net-short to the highest since May 2007 following 30 weeks of selling.

Medium Term / Buy

Instrument:

May19 Cotton option call strike 75: OCT/K19C75:icus

Price Target:

80.00 cents/lb

Market Price:

74.30 cents/lb

Background:

In the week to February 26 the net-short reached 21,000 lots with data covering the week to March 5 being available on March 8. Since peaking at 96.50 cents/lb last June the price on the first month futures contract hit a through at 69.53 cents/lb on February 15 before recovering.

The negative sentiment up until now reflects expectations from several major forecasters such as Cotton Outlook, the National Cotton Council and the US Department of Agriculture that a production surplus, helped by a strong US harvest, will emerge this coming season.

The recent recovery to the current level just below 75 cents/barrel has partly been driven by expectations of a trade deal between the US and China could trigger increased cotton exports to China.

Management And Risk Description:

Going long cotton at this stage reflects a trade that goes against current fundamentals which point to larger US acreage and increasing ending stocks this coming season. The main reason for entering the trade is for a trade deal between the US and China to drive the price higher through short-covering. On that basis we chose to implement the buy through options on the May contract. That way we reduce our risk to the premium paid for the option.

Please note that liquidity can be poor, especially outside US hours. In order to avoid unwanted slippage we recommend using limit orders when entering and exiting the market. We focus on the 75 cents/lb call on the May futures contract but please use the option chain (see example below) on the SaxoTraderGO or SaxoTraderPro for further inspiration.

Entry:

Buy the 75 Call on May Cotton, ticker: OCT/K19C75:icus

Stop:

Use limit orders

Target:

80 cents/lb on CKZ8 (representing an intrinsic value of $2500 minus premium paid plus remaining time value)

Time Horizon:

Before option expiry on April 12

Aprox. cost: 1.5 cents/lb or $800 per contract

Option chain on cotton from the SaxoTraderGO:

Source: Saxo Bank

The May contract (CTK9):

Source: Saxo Bank

Long-term view using the first month continuation chart:

Source: Saxo Bank

Topics: Trade View Cotton Commodities

Thu, 28 Feb 2019 14:30:00 Z

High grade copper was a star performer this past month on the back of tightening supply and optimism on several Chinese fronts. However, this could be an opportune time to hit the pause button.

Short Term / Sell

Instrument:

HGK9 or COPPERUSMAY19

Price Target:

$2.820/lb

Market Price:

$2.960/lb

Background:

Just like other industrial metals high grade copper has experienced a strong beginning to 2019. Following seven months of range-bound trading, the price surged higher during February en route to record its best month since December 2017. Tightening supply and optimism surrounding a trade deal between the US and China, together with recent tax and interest rate cuts in China, and a stronger CNY, have all helped support the recovery.

While we maintain an overall constructive view on copper due to tightening supply more than increased demand, we also see signs of a market in need of a correction. The RSI has moved into overbought territory and with a lot of good news on trade now being discounted the risk of a disappointment has risen. Either from the trade talks or from weaker than expected macroeconomic data from the world’s three biggest copper consuming regions.

Supporting the rally has been a recent decline in copper stocks held at London Metal Exchange-monitored warehouses. While this has created a sense of tight supply, we have simultaneously seen a strong increase in deliverable stocks at the Shanghai Futures Exchange.

The US government shutdown between December and January resulted in a delay in the reporting of speculative positions held by hedge funds. While the CFTC is expected to have cleared the backlog and be “live” again from March 5, the latest available data covers the week to February 12. It shows that hedge funds during a four-week period from January 15 had cut a near record short to almost neutral. Buying is expected to have continued since then with funds now holding a net-long.

Management And Risk Description:

Selling copper at this stage is going against the current trend, hence our relatively conservative price targets. We have chosen to place the stop above at $3.025/lb which is just above the 61.8% retracement of the June to August sell-off last year. We choose to take profit just above $2.815/lb, which represents a 38.2% retracement of the run up since early January. Besides the potential announcement of a trade deal the risk to this trade's success will also depend on the above-mentioned daily stock reports from the London Metal Exchange.

With the trade parameters laid out we do not plan to update this trade recommendation on a regularly basis.

Entry:

Sell at current price around $2.965

Stop:

$3.025/lb (1.5 ATR)

Target:

$2.82/lb (3.6 ATR)

Time Horizon:

1 – 2 weeks.

Source: Saxo Bank

Long term chart. Source: Saxo Bank

Global Head of Macro Strategy

Topics: Trade View Copper Commodities

Wed, 13 Feb 2019 10:30:00 Z

EURUSD is heavy near range support and may push lower still as the Eurozone outlook sours more quickly than the outlook for the US, where the Fed continues to actively tighten. We trade the risk for lower EURUSD levels via a put option, given very low implied volatility.

Short Term / Sell

Instrument:

EURUSD put option, strike 1.1200, expiry May 15

Price Target:

Spot price below 1.1000

Market Price:

72 pips, or 0.0072 (Spot ref: 1.1320 on Feb 13)

Background:

EURUSD is heavy near range support, with the turnaround in the US Federal Reserve guidance since the hawkish December Federal Open Market Committee meeting unable to engineer a more profound sell-off in the US dollar as the Eurozone outlook has worsened so drastically that the European Central Bank may be forced to consider easing measures at coming meetings while the FOMC is actively tightening. EURUSD may eye new local lows for the cycle, driven chiefly by concerns for the Eurozone economic outlook and ECB being a first mover in bringing new policy accommodation.

As well, given the weakening outlook for global growth, markets may have been a bit premature in celebrating the Fed’s and other central banks’ turn away from a tightening bias as historically, an easing cycle from central banks only arrives at this point in the cycle due to mounting worries of recession and with a backdrop of very weak asset markets. A fresh sell-off in global equity markets could support the US dollar, typically a safe haven from a liquidity angle during times of crisis. A wildcard risk for the euro side of the EURUSD equation is the risk of fresh existential worries driven by populist demands for expanding fiscal stimulus and concerns on sovereign debt funding at the periphery.

Management And Risk Description:

Technically, the EURUSD softness points to the range lows as a possible trigger for a more profound move lower in coming months. We take a three month put option position, in the hopes of the price action moving well below 1.1000 over the three month time frame.

Consider longer dated options and different strike prices for a different risk/reward profile.

Risks: risk to this trade is 100% loss of the amount paid up front for the option premium.

Entry:

72 pips, or 0.0072 (Spot ref: 1.1320 on Feb 13)

Stop:

n/a

Target:

Price target: Spot price below 1.1000

Time Horizon:

Short-term

Chart: EURUSD

The market looks heavy near the ultimate range low posted late last year at 1.1216. Downside optionality looks “cheap” for two reasons. First, it is rather cheap as implied volatilities are quite low relative to the historically range due to the lack of recent volatility in EURUSD and lack of anticipation that anything dramatic is set to happen. EURUSD implied volatility is currently below 6.5% for 3-month options. Second, we have to remember the interest rate carry is rather high for EURUSD and means that the forward price (on Feb 13 with a spot price of 1.1320) is 1.1405 for the May 15 expiry date.

Source: Saxo Bank

Longer-term chart:

On a longer-term chart, traders may note the lack of notable support levels should the support levels below 1.1200 – perhaps the round, psychological levels starting with 1.1000 the most important if the pair finds itself on the way down.

Source: Saxo Bank

John J. Hardy

Topics: Trade View EURUSD

Fri, 28 Sep 2018 08:30:00 Z

This week natural gas broke back above $3/therm after once again finding strong support below. We look to buy on a weekly close above $3.053 as this could signal some additional demand from momentum traders looking for an extension towards $3.50/therm.

Medium Term / Buy

Instrument:

US Natural Gas (NGX8 or NATGASUSNOV18)

Price Target:

Open

Market Price:

3.039

Background:

The US natural gas future (NGZ8) is about to finish a quarter that yielded the lowest trading range since Q2 of 1995. In percentage terms, the $0.407/therm range was the lowest since 1990 when the contract was launched. During this time we have seen record production off-set by rising exports and consumption.

This week, natural gas broke back above $3/therm after once again finding strong support below. A weekly close above $3.053 could signal some additional demand from momentum traders looking for an extension towards $3.50/therm.

Management And Risk Description:

Short to long-term weather forecasts hold a major sway on the market given the limited amount of time left to see an acceleration in storage injections. While high oil prices may provide natural gas some tailwinds, it also must be remembered that high prices attract higher shale oil production, thereby supporting a continued increase in natural gas given that some US natural gas is produced as a byproduct from shale oil.

Entry:

Market or weekly close above $3.053/therm

Stop:

Trailing stop of $0.14/therm (equivalent of 2 ATR)

Target:

Open

Time Horizon:

Medium-term

As we approach the winter months one piece of data has begun to show support. During the summer months between April and October, natural gas is being injected into underground storage facilities only to be extracted during the winter months when the need for heating raises demand from utilities, especially across the US Northeast. The current supply-demand balance is therefore used to estimate whether enough gas will be injected into storage by the end of October to meet winter demand or withdrawn from storage by the end of April to meet storage restrictions during the build-up phase.

On Thursdays, the US Energy Information Administration publishes its Weekly Natural Gas Storage Report which shows the amount of gas that goes in and out of storage. What we have seen during the past few months are lower than normal injections into storage, as consumption and exports have stayed strong relative to production.

As of last week, following another lower than expected injection, the total amount of gas in storage reached 2,768 billion cubic feet (Bcf) which is some 18.3% below the five-year average of 3389 bcf. With time running out to replenish stocks before November, we could see a market increasingly being left exposed should the US winter prove to be colder than expected.

From having been a horrendously expensive investment for passive long investors for years due to the structure of the futures curve, there are now emerging signs that a change is on the way, not least due to the ever-increasing amount of Liquified Natural Gas exports. The emerging tightness has seen the one year futures spread (1st minus 13th futures contract) move into a solid backwardation of 10% compared to a contango which at it worst point back in 2015 went above 50%.

In other words, an investor back then would need a 50% return on a one-year horizon before making any money.

Short-term Natural Gas (source: Saxo Bank)

Long-term Natural Gas (source: Saxo Bank)

Topics: Trade View Commodities Natural Gas

Mon, 24 Sep 2018 11:30:00 Z

Brent crude oil has reached its highest level since November 2014 in the wake of this past weekend's Opec+ meeting in Algiers. We look to buy the December contract on the break of the double top from May at $80.50/barrel, setting our stop at $77.40/b.

Medium Term / Buy

Instrument:

LCOZ8 or OILUKDEC18

Price Target:

Open

Market Price:

80.03

Background:

Brent crude oil has reached the highest level since November 2014 after breaking the double top from May at $80.50/barrel. The move comes after the Opec+ meeting in Algiers over the weekend failed to deliver the production increase that President Trump demanded in a recent tweet.

Trump's actions, i.e. the re-introduction of sanctions against Iran, remain the key reason why oil prices are moving higher at a time when the US-China trade war and emerging market weakness have raised some concerns about the demand outlook.

Given the immediate negative impact on supply and the not-yet-measurable future impact on demand, however, the price has found the upside to be the direction of least resistance. Adding to the strength this morning are comments from two of the worlds biggest oil traders, Trafigura and Mercuria, at the annual Asia Pacific Petroleum Conference (APPEC) in Singapore. Both highlighted the risk of crude oil (Brent) reaching $90/b this year and $100/b in 2019. Mercuria saw the potential drop in supplies from Iran as high as 2 million barrels/day. A drop of this magnitude is somewhat higher than expectations; if realised, Opec and its friends would struggle to meet the shortfall, hence the call for higher prices.

The combination of low inventories, falling spare capacity, US production beginning to look constrained, production challenges in Venezuela, and not least the re-introduction of Iranian sanctions have created a situation where fundamentals, price momentum, and geopolitical risks all point to higher prices.

Our breakout model, which is built on the Donchian Channel Framework, has given us a buy signal today on a close above $79.80/b, the previous highest close from May 23. Adding to this the break above $80.50/b today and a continued extension to $81.90/b and beyond look increasingly likely.

Management And Risk Description:

Continued dollar strength could weigh further on demand as it increases the strain on EM countries already feeling the impact of high oil prices in local currencies. Another risk is the US releasing oil from its strategic reserves to counter the shortfall.

Entry:

On a close above $70.80/barrel (LCOX8)

Stop:

$77.40/b followed by a trailing stop of $3.2/b, equivalent to 2 ATR (Average True Range).

Target:

Open.

Time Horizon:

Medium term

Charts below (daily and weekly)

Brent crude (daily, source: Saxo Bank)

Brent crude (weekly, source: Saxo Bank)