Tuesday, January 8, 2013

Overnight Highlights from CHS Hedging's Tregg Cronin 1-8-2013

Outside Markets: Dollar Index unchanged; NYMEX-WTI up $0.40 at $93.59; Brent Crude up $0.88 at $112.28; Heating Oil up $0.0340 at $3.0661; Feeders and Hogs are firmer, but fats weaker; Gold is up $7.70 at $1654.70; Copper up $0.0035 at $3.6810; Silver up $0.243 at $30.320; Softs are quiet; S&P’s are down 1.50 at 1454.00, Dow futures are down 8.00 at 13,299.00 and Treasuries are weaker.

Weaker equity markets in Asia, but firmer in Europe led by the FTSE MIB which is up 0.92%.  Economic data out of Europe overnight included executive and consumer sentiment rising to 87 from 85.7 in November.  The euro-zone’s unemployment rate did rise to 11.8% in November, however, from 11.7% in October.  It is the highest unemployment rate since the data set began in 1995.  Germany’s exports fell 3.4% in November from October.  Interesting piece from Bloomberg below on the weakness of the Dollar and how it’s been masked by an even weaker Yen.  One possible explanation for why the precipitous fall the past several weeks in the Dollar Index has supported grains any better.  Little for economic data in the US today.

Little to nothing in the way of precip in the Midwest the last 24 hours, although some snow is impacting SW-MT.  The next 48-hours will see heavy rainfall impact TX/OK/LA/AR/S-KS/S-MO/MS.  Areas of E-TX are set to receive as much as 8.0”.  Even parts of the HRW belt in N-TX and the panhandle areas are slated for meaningful precip.  See map below.  The 5-day map pushes this moisture up into the central/east corn belt.  Our Indianapolis office said they have rebuilt soil profiles.  NOAA’s 6-10 day maps confirm the push to cold and wet with below normal temps and above normal precip for much of the Midwest and WCB.  “The forecast continues to look favorable for the South American growing regions, with limited rains to favor the Argentine growing areas and average to above average rainfall to occur in the growing regions of Brazil.” – John Dee.  Only area anyone is talking about with concern is some dryness in NE-Brazil, but maps look good for coverage.  Dryness and heat in Argentina will need to be monitored.

Quiet, two-sided trade inside 5c ranges for the grains and a 9c range for beans which speaks to the lack of confidence going into Friday’s reports.  Average estimates have been published, so now it’s a matter of how far off they are from the USDA at 11:00 CDT.  Most are looking for a supportive corn report by way of higher feed/residual demand and possibly lower harvested acres offsetting a cut to exports.  No arguments here.  It will be difficult to find something bullish on wheat, unless wheat feeding occurred in much higher volumes than anyone thought.  Soybeans will be about how much the USDA raises the national yield and how large they choose to make South American crops.  Crush and exports leave little room for surprise.  Expect chop until then with yesterday’s lows to hold.

There was a bit of export business overnight with South Korea’s KFA buying 110,000MT of optional-origin corn from Noble for June delivery at a price of $310.60/MT C&F.  South Korea’s MFG bought 137,000MT of optional-origin corn from Cargill at $305.48/MT C&F for July arrival.  In total, it is though South Korea has purchased 315,000MT of corn since Friday, but most looks like SAM origin.  Worth noting, South Korea did choose to buy SAM feed wheat instead of Indian due to quality concerns.  The story said “foreign material such as bags, stones and steel is too high and cleaning costs too much.”  Deutsche Bank said they see short-term value in grains and oilseeds and recommend buying cattle and selling corn.  They also said soybean oil may outperform the Ag complex in 2013.  They are “cautious” on deferred hog contracts.  The good Dr. Michael Cordonnier left his South American production estimates unchanged, but said Brazil could move higher than 80MMT on beans if it rains in NE-Brazil.  The USDA is at 81MMT.  He did have this to say about transportion:

“According to the president of the Mato Grosso Soybean and Corn Producers Association (Aprosoja-MT) Carlos Favaro, the freight costs for exporting soybeans from Mato Grosso equates to approximately 35% of the price of the soybeans.  For corn exports it’s even worse at 50 to 60% of the price of the corn.  These figures were calculated based on the 2011/12 crop and they are expected to be even worse when the 2012/13 crop is exported.  Aprosoja-MT calculates that it takes approximately 56 days to transport soybeans from Mato Grosso to users in China while it only takes 32 days to get soybean from the Midwest to China via the Port of New Orleans.  In the U.S. the time could be reduced by nearly half if the grain is shipped out of West Coast ports.  In Brazil it can cost as much as US$ 150 per ton to transport soybeans from central Mato Grosso to a port in southern Brazil, while it only cost approximately US$ 35 per ton to move soybeans from the Midwest to New Orleans.” 

Open interest changes yesterday included wheat up 6,920 contracts, corn up 4,520, beans down 3,140, meal up 4,720 and soy oil up 2,700.  Chinese markets were mixed with beans down 5.25c, meal up $3.80, oil down 22c, corn up 2.75c, palm down 67c and wheat up 5.75c.  Meal and wheat are showing noticeable change since last Friday.  Malaysian Palm Oil closed down 28 ringgit at 2,390.  Paris Milling Wheat is unchanged, Rapeseed is up 1.71%, Paris Corn up 0.11%, UK feed wheat up 0.12% and Canola is down 0.05%.  The situation in Australia in terms of heat and wildfires continues to get worse.  Temperatures in the most populous province of New South Wales reached 108 degrees yesterday, and wild fires are evacuating thousands.  Wheat harvest is over, but sorghum is at risk.

Have to believe today will be another choppy, mixed session in the lead up to the report.  Farmers are on the sidelines awaiting the results of the report, and until then, basis and spreads will remain firm.  Whether the report is bullish or bearish and whether the farmer decides to sell grain will decide how long one can retain a bullish cash and spread stance.  Wheat/corn also looks to have value down here.

Trade as of 6:50
Corn down 1
Soy down 4-5
Wheat up 3-4

Dollar Weakness Masked by Yen as Deficit Talks Loom: Currencies
2013-01-08 05:17:33.825 GMT

     (For a Currencies column daily alert: SALT FXCOL.)

By Joseph Ciolli and Mariko Ishikawa
     Jan. 8 (Bloomberg) -- Dollar weakness against the
currencies of some of the largest U.S. trading partners is being
masked by a plunge in the yen as bets by futures traders for a
drop in the greenback re-approach the highest levels on record.
     The Dollar Index, which measures the currency against six
counterparts, has gained 1.5 percent since reaching a two-month
low on Dec. 19, as the yen tumbled 3.5 percent. The pound, the
third-most weighed currency in the index after the euro and yen,
touched a more than 16-month high versus the dollar on Jan. 2.
The number of contracts hedge funds and other large speculators
hold betting on a decline in the value of the dollar against
currencies traded at the CME Group Inc. rose to 276,830 in the
seven days ended Jan. 1, the most since October and approaching
the all-time high reached in March 2011.
     Intercontinental Exchange Inc.’s 40-year-old index, which
money managers use to help hedge against movements in exchange
rates, may be giving investors false optimism as new Japanese
Prime Minister Shinzo Abe vows to weaken the yen to spur
economic growth. Vassili Serebriakov, a foreign-exchange
strategist at BNP Paribas SA, said speculation the Federal
Reserve may end asset purchases before the end of the year,
lessening a devaluation of the dollar, may be premature with the
U.S. economy at risk from protracted budget-deficit talks.

                        Discussion Tone

     “The sharpness of the movement of the DXY is not
necessarily reflective of the overall positioning of the
dollar,” Serebriakov said in a Jan. 4 telephone interview from
New York. “Markets aren’t necessarily turning bullish on the
dollar. The tone of the discussion has changed, but this is not
a game-changer. We still think the dollar will underperform.”
     BNP sees the greenback dropping to 75 yen per dollar by the
end of 2013, compared with the median estimate of 88 in a
Bloomberg survey of forecasters. Only HSBC Holdings Plc is more
bearish on the dollar, predicting it will trade at 74 yen by
year-end, according to the survey.
     Against the euro during the same period, BNP expects the
dollar to trade at $1.32, compared with a gain to $1.27 as
forecast in a separate survey. The Dollar Index will fall to
77.20 by the end of the year, according to BNP projections.
     The Dollar Index, which also tracks the greenback against
the Swiss franc, Canadian dollar and Swedish krona, fell 0.5
percent in 2012. The benchmark gauge reached a two-year high in
July 2012 before declining 5.2 percent over the rest of the
year. It is up 0.5 percent since December, trading at 80.186 as
of 1:59 p.m. in Tokyo.

                          Ratings Risk

     The greenback may be experiencing some artificial strength
because investors have yet to look ahead to the possible
repercussions of a budget bill passed Jan. 1 that broke a
yearlong impasse over $600 billion in U.S. tax increases and
spending cuts. The sovereign-credit profile of the U.S. may be
one area that takes a hit, according to Masashi Murata, a
currency strategist in Tokyo at Brown Brothers Harriman & Co.
     “The market has not priced in the risk of a U.S. ratings
cut,” Murata said in a Jan. 4 interview. “The problems of the
debt ceiling are likely to linger in the future, and that could
be a selling catalyst for the U.S. dollar.”
     Moody’s Investors Service warned Jan. 2 that the bill
passed last week by Congress and President Barack Obama to avoid
the so-called fiscal cliff won’t reduce U.S. deficits enough to
avoid a credit-rating downgrade and further measures were needed
to support the nation’s top Aaa rating.

                          Debt Ceiling

     The U.S. reached its debt ceiling Dec. 31. Without an
extension of the spending limit, the Treasury will exhaust
measures to finance the government as early as mid-February,
according to the Congressional Budget Office.
     At the same time, the Dollar Index has gained 7.2 percent
since Standard & Poor’s stripped its AAA rating in August 2011,
triggering a surge in demand for U.S. assets as investors sought
a refuge in Treasuries, the world’s safest securities.
     The dollar’s relative strength versus its Dollar Index
peers has also been bolstered by the combination of better-than-
forecast U.S. economic data and the European recession, said
Callum Henderson, global head of currency research in Singapore
at Standard Chartered Plc.
     U.S. gross domestic product grew at a 3.1 percent annual
rate in the third quarter, exceeding the highest projection in a
Bloomberg News survey. The median estimate of economists called
for a 2.8 percent advance. December payrolls also increased more
than analysts anticipated.
     “At the moment, you have a divergence between slightly
better data out of the U.S., but persistent recession in Europe,
and that’s positive for the dollar,” Henderson said in a Jan. 4
telephone interview. “In the second half, we expect the global
economy as a whole to be recovering. And, in that environment,
U.S. investors are likely to go abroad, and that will weaken the

                       Technical Reversal

     The extent of the slide in the yen since Abe appeared as
the front-runner in the fourth quarter to retake the prime
minister’s post may lead to a reversal, according to analysts
who follow technical patterns.
     The yen-dollar exchange rate is close to its 30-year
channel support area at 89.15 per dollar, which could be a
“sticking point,” MacNeil Curry, head of foreign-exchange and
interest-rates technical strategy at Bank of America Merrill
Lynch in New York, wrote in a Jan. 4 note to clients.
     “The yen’s extreme move in the last three months does make
it vulnerable to some corrective activity,” Simon Smith, chief
economist at FxPro Group Ltd. in London, said in a Jan. 4
telephone interview. “The Dollar Index should remain below the
peaks we saw in mid-November going forward.”
     The benchmark gauge reached its highest level in more than
two months on Nov. 16, touching 81.46.

                          Yield Spreads

     The yen, which comprises 14 percent of the Dollar Index, is
mired in a slump that saw it reach its lowest level since July
2010 versus the greenback on Jan. 4. The yen fell for an eighth
week against the dollar, the longest losing streak since 1989.
     The dollar has lost 0.6 percent over the past three months,
while the yen has fallen 12 percent, the biggest drop among the
10 developed-nation currencies monitored by the Bloomberg
Correlation-Weighted Indexes. The euro has gained 0.8 percent.
     U.S. 10-year note yields were 38 basis points more than
similar-maturity German bunds yesterday, nearly twice the amount
as recently as Dec. 4. The difference widened to 44 on Dec. 31,
its largest margin since April.

                        ‘Marginal Driver’

     The increased appeal of U.S. sovereign debt over that of
its German counterpart can be attributed to positive economic
data, according to Shahab Jalinoos, a senior currency strategist
for UBS AG in Stamford, Connecticut. It has also contributed to
the strength of the greenback in the Dollar Index, not just
against the yen, but also the euro, which is weighted more
heavily at 58 percent, he said.
     “Interest-rate differentials between the U.S. and Europe
are actually moving in the U.S.’s favor,” Jalinoos said in a
Jan. 2 telephone interview. “There’s been an underlying
improvement in U.S. data, allowing yields to go towards the top
of the trading range they’ve been in for the past six or seven
     Foreign-exchange strategists predict that the yen will
trade at 88 per dollar by the end of 2013, while the Dollar
Index is projected to be at 80.8.
     “The Dollar Index seems to be unraveling a bit,” Jalinoos
said. “The marginal driver of the Dollar Index has been yen
weakness, but that doesn’t really represent what’s going on.”

For Related News and Information:
Top currency stories: TOP FX <GO>
Currency forecasts: FXFC <GO>
Foreign-Exchange Information Portal: FXIP <GO>
World currency ranker WCRS <GO>

Tregg Cronin
Market Analyst
651-355-3723 fax
CHS Hedging, Inc.
The Right Decisions for the Right Reasons

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