To QE3, Or Not to QE3?
Mar 07, 2012
The "outside" markets continue to be of concern. I get the feeling the funds are more worried than ever about the recent turn around in the US dollar, in fact it seems there maybe a little rotation occurring as some investors seem to be looking to safer havens as opposed to those with a higher-beta.
Let's not forget we saw a ton of money flood out of the commodity sector last year when investors started to bank profits and quickly looked for less riskier type plays. I am not saying the commodity bull run is anywhere close to being over, I just think we have to more accurately identify when the "outflows" are going to hit us, and when the money-flow is going to temporarily look for shelter in safer asset classes. If they feel they have banked good profits in the riskier arenas they may look to ride out a portion of the storm in a more sheltered environment in order to hang onto the recent gains.
I continue to be asked by many of the "old-school" fundamental grain traders why I put so much emphasis on the US dollar these days. Rather than going into an elaborate rant or in-depth formula I have opted to simply include two charts. The top chart is a 5-year weekly chart of the US Dollar, while the second chart is 5-year weekly of the Corn market. I urge you to study these charts very closely, then ask me again why it is so important that we understand the movements and correlations associated with the US Dollar. As you can see there is a direct correlation. The 2008 high of $7.65 in corn came as the US dollar trade to it's lows. The 2011 high of $7.99 once again came as the US dollar tested new lows. My point is without the help of ALL the funds we will NOT get to these extremes. With a majority of the funds trading the "Macros" we need all of the stars properly aligned...it is no longer simply about the Supply & Demand numbers!
The question now becomes "to QE3 or not to QE3?" Some very well respected sources, and what I consider to be extremely "smart-money" tells me the Fed will be most apt to pull the trigger on another round of QE3 in late April or early May for basically two reasons. First they want to make sure they have all of their ducks in a row prior to the start of the US presidential election. Meaning the Fed does NOT want to be stirring the pot or creating any waves while the Democrats and Republicans are battling it out for Presidential votes. Second there is some talk that the Fed will have the firepower they need to pull this maneuver off as the GDP numbers start to slip on aggressively higher fuel costs. Understand what I am saying here, the rising fuel costs may give the Fed the go ahead as the GDP here it home falls under some unexpected pressure. Obviously the political powers that be can not afford for the GDP to fall, and can not afford for another economic meltdown, especially in an election year. Therefor the Fed may look to preempt any type of setback with another round of quantitative easing. The take away here is that QE3 is vitally important if we are to see the Funds making big bets on higher commodity prices. If it begins to look as if QE3 will not be happening then we may see the US Dollar strengthen even more and commodity prices start to deflate. Keep in mind this is just the opposite of what Bernanke and the Fed want to see happen. As you know they are looking for a weaker US dollar and higher inflation.
We should also remember that "politics" will continue to trump the "fundamentals" during this election year as well. This may be no more evident than the fact several powerful US Senators are once again looking for answers in regards to "speculation." The talk in Washington is that the blame for higher energy prices may soon start to be directed back towards the large "speculators." There have been a few stories circulating that several influential US politicians are questioning what, if anything, has been done to reign in excessive speculation, especially in the energy markets. All I am saying is if Washington starts to put more heat on the CFTC, you might see some of the bigger fund players get spooked, choosing to liquidate rather than battling the government...just another moving "part" that we need to add to the equation.
We may actually see crude oil fall under a little pressure in the short-term as six of the world's leading powers US, China, Russia, Germany, France and UK agree to reopen talks with Iran in regards to its nuclear program in hopes of helping to avoid an air strike by Israel forces. I personally doubt it will do any good, but with gas prices around the world surging, global leaders are becoming extremely concerned.
From a more traditional fundamental Ag perspective there really hasn't been much of a change in the landscape. All eyes seem to be zeroing in on Friday's USDA numbers. I just hope we don't see the proverbial "buy-the-rumor / sell-the-fact" type trade activity off the USDA data. My fear is that even though the report is bullish...will it be bullish enough for the trade becomes the question?
Obviously it is all about the South American production numbers. As we sit here today the USDA is estimating the Argentine corn crop at 22 million metric tons. We all know this number is coming down, but the question is how far? I have the feeling the market is currently trading at an estimated 20 million metric level or lower. The problem is the so called "average" trade guess is above 21 million metric tons. There is a similar type action taking place in soybeans, as the USDA is currently estimating Brazils soybean production at 72 million metric tons, while the market seems to be trading something more like 68 million metric tons or lower, while the "average" trade guess is just north of 69 million metric tons. My point is even though the USDA will be making cuts to both corn and soybean production in South America, they will need to make more substantial cuts than the "average" trade guess or the markets will be disappointed and break lower on the news.
We also need to be keeping a closer eye on soybean meal demand both domestically and globally. As I have mentioned on several occasions if meal demand starts to really pick-up it could certainly provide the fuel needed to prompt an even stronger soybean rally. There is starting to be some speculation that DDG usage in China may take the back seat to more traditional soymeal feedings as their hog herd rapidly expands. Obviously with the South American setbacks a jump in global meal demand could push soybeans even further.
* I would suspect more position squaring ahead of Friday's highly anticipated USDA report. Choppy trading on both sides of the fence should prevail. If the ADP numbers are weak, we may face some additional outside market headwinds. In my opinion, Spec's wanting to add length or initiate bullish positions in soy should continue to wait patiently. I may end up being painfully wrong, but I also believe the bull spreads in both corn and soy are due for a little break as we head into the US planting season. FWIW there are some talks starting to circulate that the weather pattern is turning "wetter" and may even start to cause some planting "delays" in some select areas. We are already hearing about a few delays in the south and delta regions. Producers should use the recent rallies to get caught up on their soybean sales. I continue to patiently wait to pull the trigger on more new crop corn.