Perspective: Morning Commentary, 02/04/2016

Thursday, February 04, 2016

February 4 – The dollar sustained its plunge overnight as investors rushed to exit the greenback. Economic data continues to suggest that the Federal Reserve will have a difficult time raising interest rates again for quite some time – perhaps not before 2017. Fed funds futures trading currently suggests that the Fed’s key rate will remain unchanged the rest of this year, providing little encouragement for dollar bulls to hold their ground amid this current liquidation phase.

The market is searching for a reason for the selloff, and some are being provided. But the fact is that this has more to do with the shifting sands of market emotion than it does any one single reason. One can talk of unwinding spreads, dovish comments made by members of the Fed, poor economic data etc., but the fact is that a lot of people who were long the dollar suddenly became very uncomfortable as sentiment began to shift and chart signals changed. The historically large two-day collapse is one of the grander ones you will see, demonstrating how quickly market sentiment can swing when the players are leaning hard in one direction.

The Bank of England announced this morning that it would leave its key interest rate at 0.5%, unchanged as anticipated. However, it remains in the camp of much of the rest of the world, which is one of monetary easing. Europe’s problems remain very real, with the full impact of the refugee crisis not yet felt by its economy. Japan’s and China’s economic problems are very real, although we caution against the “sky is falling” mentality endorsed by some. As such, the dollar’s fundamentals have weakened considerably, but in many aspects it remains the best looking horse in the glue factory.

The question now is whether the commodities can finally confirm a multi-year bottom amid the change in dollar sentiment? Thus far action in the broader commodity indices suggests a very cautious approach with an upward bias. Like the dollar, sentiment toward the commodities can change in a hurry, particularly if we see a lingering trend toward money leaving stocks. Fundamentally, most commodities remain amply supplied, although risks are rising somewhat for the food-based commodities as we enter a transition from strong El Nino toward La Nina in the current year. A sluggish global economy is expected to keep demand for many other commodities subdued this year, although demand should begin to stabilize at current low values. As such, traders will be watching chart signals closely for the major commodity indices for confirmation of any changing market sentiment.

In that light, USDA’s weekly export sales report reflecting demand in the week ending January 28 provided little in the way of fresh fodder for market bulls, other than in the corn market. Net corn sales during the week reached a solid 45 million bushels, but sales to date continue to trail the seasonal pace needed to reach USDA’s current disappointing target by 145 million bushels, with actual shipments falling short by a similar amount. Meanwhile, net soybean export sales were a measly 0.8 million bushels as “unknown destinations” reduced previous purchases by 13.8 million, while China did so for another 2 million bushels as business shifts south of the equator. Wheat export sales were a mere 5.7 million bushels for the week.

USDA will be updating its global production estimates on Tuesday, but only relatively minor adjustments are anticipated at this point for South America as the agency waits for more data to come in. The February report is not known for its surprises and few will likely be seen. Rains are shifting around in Brazil, allowing harvest to progress and safrinha corn to be planted, while providing some limited loading delays at ports. Roughly half of Argentina's ’rain belt remains dry, with 20% seeing significant crop stress. However, it is still relatively early in the crop maturity cycle and significant rains are expected to expand across nearly all of the belt between late Friday and early on Tuesday, providing timely relief for corn and soybeans.

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