The opinions expressed in this report are those of Inspirante Trading Solutions Pte Ltd (“ITS”) and are considered market commentary. They are not intended to act as investment recommendations. Full disclaimers are available at the end of this report.

Executive Summary

Bank of Canada's recent interest rate cut, the first among G7 central banks, could be a harbinger of similar actions by other central banks in developed economies. The shift towards looser monetary policy could have significant implications for commodities.

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Investors will closely monitor the latest inflation data from major economies to determine if the figures align with policymakers' expectations.

Markets in focus

Figure 1: Corn futures (Dec 2024)

The rally in May demonstrated potential but faced resistance, leading to a retracement. Despite this, the bullish technical setup remains intact within an ascending channel, characterized by higher highs and higher lows.

Figure 2: Feeder Cattle futures (Aug 2024)

Feeder cattle prices have been consolidating within a large symmetric triangle for over 10 months. As it approaches the apex, the likelihood of an imminent breakout increases.

Figure 3: Live Cattle futures (Dec 2024)

Live cattle price exhibits a similar coiling pattern to feeder cattle and is currently testing the upper resistance, indicating a potential breakout.

Figure 4: CAD/USD futures (weekly)

CAD/USD has reached a multi-month horizontal support level, slightly above the previous significant lows in 2016 and 2020. The Commitment of Traders (CoT) report reveals historically extreme speculative short positions.

Our market views

In early June, the Bank of Canada (BoC) became the first among the G7 central banks to initiate interest rate cuts as inflation in Canada showed signs of easing. This policy move was widely anticipated, resulting in a muted reaction from asset prices, including the Canadian dollar. However, the implications of this decision are far-reaching.

Firstly, even though the yield differential between Canada and the United States exerts pressure on the CAD/USD currency pair, Governor Macklem said, "There are limits to how far we can diverge from the United States." Is it wise to anticipate a significantly wider yield differential, and consequently, a further decline in CAD/USD? Current market positioning is also very lopsided, with the largest speculative shorts and commercial longs observed in the CAD/USD futures market. Historically, such extreme positioning has often marked significant market bottoms, followed by sharp rallies.

Secondly, the monetary policies of major central banks, especially those within the G7, tend to be synchronized. While the pace of adjustments may vary, these developed economies typically experience their rate hiking and cutting cycles in tandem. This synchronization indicates that global peak tightening is likely behind us, paving the way for looser financial conditions. In such a global macroeconomic environment, commodities generally perform well. Our bullish outlook on agricultural commodities remains unchanged. As detailed in our previous analysis, the factors supporting higher corn prices are still in place. Despite a recent pause and retracement in price action, the technical bullish bias also remains intact.

Corn prices play a crucial role in determining the prices of other commodities, particularly cattle. CME Group lists two commonly traded cattle futures: live cattle, which are ready for slaughter, and feeder cattle, which are younger and sent to feedlots to be fed with corn until they reach market weight. Consequently, there is a relationship between live cattle prices, feeder cattle prices and corn prices, known as the Cattle Crush. In essence, when other factors remain equal, an increase in corn prices leads to a higher Cost of Gain (which is a financial metric used in the livestock industry to measure the cost incurred to increase the weight of an animal), resulting in lower feeder cattle prices relative to live cattle prices. We are closely monitoring the livestock market, as our bullish view on corn suggests potential opportunities in the Cattle Crush spread.

How do we express our views?

We consider expressing our views via the following hypothetical trades1:

Case study 1: Long CAD/USD futures

We would consider taking a long position in CAD/USD futures (6CU4) at the current price of 0.73, with a stop-loss below 0.70 and a hypothetical maximum loss of 0.73 – 0.7 = 0.03 points. Looking at Figure 4, if the price rebounds from the current support, CAD/USD has the potential to reach 0.83, resulting in 0.83 – 0.73 = 0.10 points. Each CAD/USD futures contract represents 100,000 Canadian dollars and each point move is USD 100,000.

Case study 2: Long Corn futures

We would consider taking a long position in Corn futures (ZCZ4) at the current price of 464, with a stop-loss below 440, a hypothetical maximum loss of 464 – 440 = 24 points. Looking at Figure 1, if corn prices rebound from the current support, it has the potential to reach 520, resulting in 520 – 464 = 56 points. Each Corn futures contract represents 5,000 bushels and each point move is USD 50. Mini-Corn futures contracts are also available at 1/5 of the standard size.

1 Examples cited above are for illustration only and shall not be construed as investment recommendations or advice. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. Please refer to full disclaimers at the end of the commentary.


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