Trade view /
01 September 2016 at 11:20 GMT
Look away now if you only focus on fundamentals! Sugar traded on New York’s futures market is currently up by 32% year-to-date. The outlook for a world supply deficit in both 2015-16 and 2016-17 has been the main reason behind the surge, which primarily occurred during the second quarter. The International Sugar Organization has said that the rally has further to run with world inventories at critically low levels despite foreseeing a rise in output.
Since reaching a peak on July 5 at 21.22 cents/lb, a near four-year high, the sweetener has since been settling into a range gravitating around 20 cents/lb.
Hedge funds have been a significant market participant this year. Despite seeing the market trading sideways for the past three months, they have continued to add to an already record net-long position that currently sits at 281,409 lots. A position this size corresponds to 14.3 million tonnes or 8% of annual consumption (USDA). It also corresponds with 3.5 days of the total traded volume on the futures exchange. The graph below also shows that the gross-short (red line) in the market has been almost wiped out, leaving the long to short ratio well above 20.
Such a scenario can be maintained as long the technical outlook continues to support. The bulk of the speculative long in the market focus more on the technical picture than fundamentals and if that turns negative the price will be impacted.
Sugar (short-term chart):
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Source: Saxo Bank
Management and risk description
This is mean reversal trade based on extended one-sided positioning with fundamentals currently not supporting weaker prices. From a seasonal perspective sugar has been rising in four out of the last five years during September.
On hitting the first target lower the stop on the remaining to a trailing stop of 0.60 cents.
Sugar (long-term chart):
Entry: sell SBV6 or SUGARNYOCT16 on a break below 19.60 cents/lb.
Stop: stop: 20.20 cents/lb (1 ATR).
Targets: 18.70 and 17.90.
Time horizon: three to four weeks (The October contract expires at the end of September).
— Edited by Michael McKenna
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