U.S. Dollar Index:
The U.S. Dollar Index since March of 2020 has plummeted 13.5% from the high near 103. As the Federal Reserve added liquidity to markets to stabilize the U.S. economy due to COVID-19 lockdowns, the quantitative easing program featured the purchase of government and corporate bonds and the result was a fall in bond yields and interest rates. The sharp fall in the dollar made the value of U.S. agricultural commodities more attractive to foreign importers. That played into the hands of corn and soybean ongoing bull markets, which rose on declining supply and torrid new China demand. The range on the index since Dec. 1 has primarily been between 90 and 92, with a brief foray below 90 in early January. This shows the index is "coiling," which means moving withing a tight range and ultimately a breakout in either directions could occur. With the coronavirus recovery continuing, the Federal Reserve has vowed to keep interest rates low, pressuring the dollar, while investors continue to seek risky assets. The market sentiment on the dollar is still extremely bearish, with major financial firms such as Citigroup, Goldman Sachs and UBS predicting a further precipitous fall in the U.S. dollar in the months ahead. The dollar is thought to currently be in a cyclical downturn, which is not expected to bottom until 2024. Key areas to keep an eye on are another break below January lows (89.20), and the 2018 low of 88.25. A breach of the latter will likely lead to a test of 83.50. If those predictions come to fruition, then expect the commodity bull market to extend even further. However, traders are expecting a rise in inflation in 2021. That could eventually lead to the Fed moving to raise interest rates. If that were to occur, then we could see the U.S. Dollar Index break out to the upside, leading to liquidation in assets, including ag commodities. Keep an eye on the U.S. Dollar Index, as one of several key factors that will influence the direction of ag prices in 2021 and beyond. Perhaps the key factors at this point remain weather and China demand.
July Corn Futures:
The corn bull market appears to be alive and well as we approach the end of February. July 2021 futures show a range of $5.12 to $5.50 that could determine where we go. The USDA Ag Outlook Forum last Thursday-Friday continued to paint a constructive, if not downright bullish, long-term picture for corn (and soybeans). While the 1.552 billion bushel (bb) ending stocks number for 2021-22 USDA projected reflected only a rise of 50 million bushels (mb), if assumptions on yield, production and demand are correct that number could end up being much tighter. Most private analysts, based on sales and shipments to date, see the forum's 2020-21 ending stocks being more like 1.1 billion bushels (bb) to 1.2 bb, and projecting that to 2021-22 would create another tight stocks situation, likely putting more upward pressure on corn prices. Keep an eye on July corn closing prices for a breakout above $5.50 or below $5.12 that will likely determine the fate of corn futures. While July corn is still in a bullish market mode, with all key moving averages rising, both relative strength index (RSI) and slow stochastic indicators are neutral, so we could move sideways a bit before a breakout occurs.
July Soybean Oil:
World vegetable oil markets, including Malaysian palm oil, Canadian canola, and U.S. soybean oil futures, continue to rise in dramatic fashion; it is possible we could be nearing a peak. May canola futures have set multiple new contract highs in the past week, while soybean oil futures have as well. However, both markets are showing signs of being severely overbought. The implication is that each market is due for a correction. It's not a matter of if, but when that might occur. May canola futures currently have a slow stochastics reading of nearly 95% and an RSI of close to 76% -- both suggesting a wildly overdone market. July soybean oil futures, while not as bad, reflect a stochastics number near 89%, and an RSI of 70%. The tight fundamentals for vegetable oils have not changed at this point, but markets get overdone, funds are long, and high prices often cure high prices. Watch for a nice setback in these markets, although there is no timetable to predict just when that might occur.
Comments above are for educational purposes and are not meant to be specific trade recommendations. The buying and selling of grain and soybean futures involve substantial risk and are not suitable for everyone.
Dana Mantini can be reached at: Dana.Mantini@DTN.com
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