WCU: Agriculture rally continues despite dollar strength WCU: Agriculture rally continues despite dollar strength WCU: Agriculture rally continues despite dollar strength

WCU: Agriculture rally continues despite dollar strength

Ole Hansen

Head of Commodity Strategy

Summary:  Just like the stock market, the commodity sector ran into profit taking this past week. Following six consecutive weeks of gains the Bloomberg Commodity Index lost 1% with the main driver being the abrupt turnaround in the dollar. The agriculture sector led by coffee, soybeans and wheat managed another weekly gain with underlying supportive fundamentals more than off-setting the pull from a stronger dollar.


Just like the stock market, the commodity sector ran into profit taking this past week. Following six consecutive weeks of gains the Bloomberg Commodity Index lost 1% with the main driver being the abrupt turnaround in the dollar. The Greenback received a bid, especially against the euro, after responding to a “line in the sand” comment from the European Central Bank when the EURUSD reached €1.20, the highest since May 2018.

Crude oil saw a long overdue expansion to the downside of the recent tight range after demand recovery concerns, the upcoming refinery maintenance season and the stronger dollar helped trigger some profit taking. Gold’s failure to reclaim $2,000/oz led to selling as the dollar suddenly strengthened and yields moved higher in response to better-than-expected US economic data. While gasoline demand has recovered, a glut of distillates such as diesel and jet fuel, both unavoidable products in the process of producing gasoline, saw ULSD Diesel drop to the bottom of this weeks leaderboard. 

The agriculture sector rose again, albeit at a slower pace than the previous three weeks. Weather concerns, the overall weaker dollar, strong Chinese demand for key crops and the economic recovery following the Q1 collapse have all supported the sector. The top five commodities this past week all belonged to the agriculture sector with coffee out in front followed by soybeans and wheat. 

Gold traded lower but within its established range as the dollar became the main source of inspiration for traders. However, some signs that the metal was running low on fuel emerged after it failed its attempt to break back above $2,000/oz. Despite support from a weaker dollar and 10-year US real yields hitting record lows, the focus quickly turned to the search for support which was found ahead of $1900/oz.

The ugly all-day slide in US equities on Thursday was all but ignored by the wider market. The 5% drop in the Nasdaq only reversed a few days’ worth of gains while occurring at a time where many of the mega cap technology stocks had reached valuations difficult to justify by most metrics. Only an accelerated sell-off in stocks could begin to negatively impact gold. In order to cover losses elsewhere traders may, just like a brief period back in March, turn to gold selling in order to access liquidity.

With gold having failed to benefit from the aforementioned tailwinds earlier in the week, the short-term outlook points to a prolonged period of consolidation and potentially a bigger correction than what we have witnessed so far. In order to determine the direction, the focus will stay with the dollar and the direction of US real yields. As per the chart below the three lower highs is a concern and it may signal the need for a deeper correction as short term longs exit the market looking for better entry levels. The levels of support currently on our radar are:

$1900/oz - Recent lows and a level where some breakout models are likely to exit long,
$1837/oz - The 38.2% retracement of the March low to August high

Source: Saxo Group

Crude oil was dragged lower by weaker margins as refineries struggled with an overhang of unwanted distillates such as diesel and jet fuel. Adding to this the mentioned dollar strength and some lingering concerns about the current pace of demand recovery. Something that was reflected in weaker time-spreads. An example being the spread between the first and the second WTI crude oil futures contract which reached its widest level since June.

The cost of transporting crude oil on the Middle East to China benchmark route dropped to the lowest since May 2018 on signs that Chinese demand was slowing following a record buying spree since the March/April price collapse. The risk of a near-term price weakness also saw demand for downside protection rise with WTI put volumes rising to the highest since mid-June. 

From a trading perspective the break below the uptrend from June may signal a prolonged period of sideways trading with the downside risk initially limited to the low 40’s. An extended stock market correction and/or further dollar strength may together with negative Covid-19 developments pose the biggest threat to our expectations for higher oil prices towards the end of the year and into 2021.

    Source: Saxo Group

    Copper was a market that was left unscathed by dollar and stock market corrections. It quickly found support following a mini correction amid tightening supply of London Metal Exchange inventories which have slumped to the lowest since 2005. The main driver being the Chinese economy which continues to recover from the coronavirus pandemic.

    Silver’s traditional ability to outrun gold in both directions was once again on full display. Earlier in the week it hit a fresh three-year high relative to gold after the XAUXAG ratio briefly dropped below 70 ounces of silver to one ounce of gold. As gold corrected lower silver took another tumble with the ratio widening to 73 while the XAGUSD went looking for support ahead of $26/oz.

    Arabica coffee was the star performer on a combination of a stronger Brazilian real and a tightening market. Inventories at exchange monitored warehouses have fallen to the lowest since 2000. For the past few years ample supply had resulted in one of the most elevated contangos across all commodities. The bigger the contango the more a speculator gets rewarded for holding a short position. From a 12-month contango of more than 10% a few months ago it has now collapsed to less than 3% thereby removing a major incentive for selling into rallies.

    Source: Saxo Group

    Quarterly Outlook 2024 Q3

    Sandcastle economics

    01 / 05

    • Macro: Sandcastle economics

      Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

      Read article
    • Bonds: What to do until inflation stabilises

      Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

      Read article
    • Equities: Are we blowing bubbles again

      Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

      Read article
    • FX: Risk-on currencies to surge against havens

      Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

      Read article
    • Commodities: Energy and grains in focus as metals pause

      Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

      Read article

    Disclaimer

    The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

    Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. Please read our disclaimers:
    Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
    Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

    None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

    Saxo Markets
    88 Market Street
    CapitaSpring #31-01
    Singapore 048948

    Contact Saxo

    Select region

    Singapore
    Singapore

    Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

    Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

    The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

    The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

    This advertisement has not been reviewed by the Monetary Authority of Singapore.

    Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.