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Tue, 28th March 2017

Anirudh Sethi Report

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Archives of “futures contract” Tag

China iron ore prices lead industrial commodities lower with 6.7% dip

The price of iron ore in China fell as much as 6.7 per cent on Monday as markets reacted to data showing port inventories of the steel-making ingredient rose again last week.

Iron ore futures contracts traded on the Dalian Commodity Exchange had recovered slightly in afternoon trading to be down 6 per cent at Rmb545.5 per metric tonne.

The drop puts the price of iron ore at the lowest level since January 10 and represents a fall of 17.6 per cent from the most recent intraday peak of Rmb661, seen on on March 16.

Other hard commodities were faring badly in China on Monday as well: Shanghai copper futures were down 1.8 per cent and futures in Dalian for coking coal, used in steel making, dropped 3.8 per cent.

Futures on the Zhengzhou Commodity Exchange for thermal coal, used to generate energy, were down just 0.5 per cent.

Trading Position : Build Long Euro and Aussie Positions but Slash Canadian Dollar Longs

There were three significant position adjustments by speculators in the currency futures during the CFTC reporting week ending March 21.  
In the euro, the bears ran for cover and the bulls ran with the wind at their back.  The bulls add 11.3k contracts to their gross long position, bringing it to 159.6k contacts.  Meanwhile, the bears covered 10k contracts to bring their gross short position to 179.3k contracts.  The net short position was to 9.7k contracts from 41.0k contracts, which is the smallest since mid-2014.   
Bulls and bears were active in the Australian dollar futures, but their activity largely canceled each other out.  The net position changed by less than 2k contracts.  The gross long position rose by 11.8k contracts to 85.4k, while the gross short position rose by 10.2k contracts to 40.4k.  
The most dramatic change was in the Canadian dollar futures.  The bulls capitulated.  The gross long position was slashed by 44.3k contracts to 30.3k.  The bears were not as bold.  They added 1.5k contracts to the gross short position, lifting it to 54.7k contracts.  The net position swung back short (-24.4k contracts vs. +21.5k contracts) for the first time in two months.  
Speculators were also active sterling, but just shy of our 10k contract threshold of significance.  In contrast to the Australian dollar where speculators added to both long and short positions, in sterling, both longs and shorts were trimmed (9.9k contracts and 9.1k contracts respectively).  The net position hardly changed, a little above 107k contracts.  
Modest position adjustments in Mexican peso saw the net short position slim to 3.3k contracts, the smallest since November 2015.  As recently as the end of January, the net short speculative position stood at 73k contracts.  The decline has been due in nearly equal measure between new longs being established and old shorts being covered.  

Market Doubts of Three Fed Hikes This Year Caps Dollar

Bringing forward expectations of a Fed hike from May-June to March was worth something for the dollar, but to get more now, the market may need to recognize the risk of three (or more) hikes this year.  With the strong February jobs growth and a 2.8% year-over-year increase in hourly earnings, rarely does the market’s confidence in an event surpass current expectations for a hike on March 15.
However, the market sees around a one-in-three or a one-in-four chance of a third hike this year. The risks for the updated forecasts from the Federal Reserve seem asymmetrically tilted higher, more rate hikes than fewer by more members.  The hawkishness of regional presidents may be underestimated.  The data and the global climate are conducive for expediting the normalization process.  The hawks will likely feel vindicated by recent developments and may press their case with more vigor.
The focus of the Fed has arguably shifted.  Previously, the issue was whether the data would confirm that the economy was evolving toward the Fed’s targets.  It did.  Rather than focus on the data points per se, officials appear more confident of the direction and resilience of the economy and prices.  They now are looking for opportunities, which helps explain the campaign to prepare the market for the March 15 move.
Still, the dollar’s technical tone has deteriorated, and the risk is on the downside over the next several sessions.   Our working hypothesis is that the dollar’s recovery that began in early February against most of the majors ended and a correction has begun,   For the Dollar Index, this means potential toward 100.75 and possibly 100.40.  The former is the 50% retracement of that rally and coincides with the 100-day average (~100.80). The latter is the 61.8% retracement.  Alternatively, if the Dollar Index has carved out a double top near 102.25, the neckline is around 101.20 (38.2% of the rally is ~101.10).  On a break of the neckline, the measuring objective is 100.
The euro’s pre-weekend rally saw it surpass the 50% retracement objective of its decline from the February 2 high near $1.0830.  That retracement was around $1.0660, and the 61.8% retracement is closer to $1.0700.  The euro’s five-day moving average crossed above the 20-day average for the first time in a month.  The single currency may be tracing out a double bottom at $1.05  The neckline is $1.0630.  The measuring objective is around $1.0760.

New Fed paper finds ‘considerable uncertainty’ on FOMC economic projections

The Federal Reserve have a new research paper out:

(full piece at that link, PDF)
In brief (bolding mine):
  • Since November 2007, the Federal Open Market Committee (FOMC) has regularly published participants’ qualitative assessments of the uncertainty attending their individual forecasts of real activity and inflation
  • Benchmarks used 
  • This paper documents how these benchmarks are constructed and discusses some of their properties
Several conclusions:

Traders Throw In The Towel On March Rate Hike

As we previously noted, while speculatrs had been reducing their shorts in Treasury futures, they had added to Eurodollar shorts – pushing their bets on Fed rate hikes to record highs. However, as Bloomberg notes, signals are starting to emerge that traders who built up that heavy short, or hawkish, eurodollar base since the start of 2016 could be starting to throw in the towel on a March Fed rate hike.

CME confirmed that Wednesday saw record volume in fed fund futures of 658.7k contracts, beating the previous record of 613k on Nov. 9, the day after the U.S. presidential election. Over the course of Wednesday’s session, a total of 283k Apr fed funds futures contracts traded, largest single-day volume seen in the contract. Open interest in the contract rose by 109k, suggesting some short covering before the minutes and potential new longs after the minutes.

BOJ Dec. meeting minutes published now – main points

Minutes from the Bank of Japan December 19 & 20 meeting

  • Most members shared view momentum for Japan’s inflation to reach 2 pct inflation was being maintained
  • Some members said factors that would support rise in prices going forward had been increasing
  • One member said recent yen depreciation might push up prices in short run but would not raise underlying trend in inflation
  • Many members said yield curve control had been functioning as intended, JGB yield curve had been formed smoothly despite global yield rises
  • Many members said BOJ must pursue powerful monetary easing as still long way to go to hit 2 pct inflation target
  • A few members pointed to market views that BOJ wants to guide 10-yr JGB yield at range of -0.1 to 0.1 pct, said it was inappropriate to set such “uniform standards”
  • One member said it was uncertain whether amount of JGB purchases would decrease going forward under yield curve control
  • One member said BOJ should set amount of its JGB purchases as operating target and make sure to reduce it incrementally
  • One member said BOJ should allow for natural rise in long-term rates if they reflect prospects for improvement in Japan’s economy, prices
Headlines via Reuters

An Update For Forex ,Crude

The US dollar rose more than 8.5% against the yen in November, and finally at the end of the month, speculators finally switched to a new short position for the first time this year.  
In the CFTC reporting week ending November 28, speculators added 12.1k contracts to their gross short position, lifting it to 72.4k contracts. Speculators added a little less than one thousand contracts to the gross longs, which then stood at 72.1k contracts.
Since peaking in early October near 102k contracts, 30k gross long contracts have been liquidated.  Over the same period, almost 40k contracts have been added to the gross short exposure.  The result is that the net position is short about three hundred futures contracts.  That leaves the Australian dollar as the only currency futures we track in which speculators are still net long.  And even there they are back.
During the latest reporting period, speculators liquidated 8.7k long Aussie futures contracts, bringing the position down to 54.8k contracts.  About 1.1k contracts were added to the gross short position, so it stood at 33.8k contracts.  The net long position fell by a third to 21.0 contracts.
Growing the gross short yen futures was the largest speculative position adjustment, but speculators were also active in euro futures.  The bulls added 9k contracts to the gross longs (to 136.1k), while the bears grew the gross short position almost as much (8.9k contracts to 255.3k).

Dollar Correction may be at Hand, but likely Brief and Shallow

After a three-week rally, the dollar bulls finally showed signs of tiring ahead of the weekend.  Technical indicators have begun rolling over from over-extended conditions. Nevertheless, the dollar’s pullback is limited in time to the first part of the week ahead, and in scope to only modest retracement targets ahead of the US employment data, the Italian referendum, and the Austrian presidential election on December 4. 
We have suggested that the dollar’s advance was fueled by the divergence that had little to do with the US election.  It is clear from Fed comments and the minutes from the November FOMC meeting that officials were prepared to hike rates regardless of the election outcome.  Moreover, subsequent data has been mostly better than expected.   
Trump’s promise of significant fiscal stimulus with the world’s largest economy already grown near or above trend, the inflationary implications are clear.  Nominal rate differentials have widened significantly in US favor.  We are cautious are extrapolating too much from the inflation-linked securities as the liquidity premium tends to exaggerate the movement.  Also, Fed funds futures strip has not fully priced in two hikes next year, suggesting potential room further adjustment.  
Since November 4, a few days before the US election, the Dollar Index rose about 5.35% at last week’s peak just above 102.00.  The RSI has rolled over, as has the Slow Stochastics.  The MACDs may turn next week.  Initial support is seen in the 101.00-101.20 and then 100.65.   

‘A genuine first’: LME makes move into mainland China

The London Metal Exchange has made its first move into the warehousing business in China, with plans to test its new warehouse receipt system in the world’s largest consumer of metals.

The Hong Kong Exchanges and Clearing-owned company said warehouse operator Henry Bath would sponsor a pilot roll-out of the LME’s warehouse receipt system in China, which would allow users to register metal on the exchange.

The initiative comes after a scandal erupted in the port city of Qingdao in 2014 where metal in a warehouse was allegedly pledged to back bank loans to multiple owners.

“It’s a genuine first for the exchange. It’s no secret that we’ve hoped to launch services in China for some time,” Garry Jones, CEO of the LME said Monday.

WTI Surges Above $51 After Unexpected Crude Inventory Draw

Seasonally, expectations are for continued builds in inventories (following last week’s biggest build in 6 months) but API reported a massive 3.8mm drawdown (against 2.1mm build expectations) sending WTI prices soaring. Distillates also saw a notable draw as Gasoline built modestly. Cushing saw the biggest draw since Feb 2014.

API

  • Crude -3.8mm (+2.1mm exp)
  • Cushing -1.96mm (-1.4mm exp)
  • Gasoline +929k
  • Distillates -2.3mm

As Bloomberg added, “We’ll see what happens with the weekly DOE’s. People will look for confirmation tomorrow about how much refining capacity is offline,” Sam Margolin, energy markets analyst at Cowen & Co., says by phon.