The opposing views of the white house

The week has overall ended up positive for grain producers in Australia. The market has been largely driven by noises from the white house, which seem to have very opposing views on the future of their economy. In this weeks comment, we take a look at the descent of the Chicago futures, and the strong ascent of the Australian dollar.

The futures market has regained some traction in the past week, with Chicago spot futures up 4% since the 19th Jan. There are some concerns about weather in the northern hemisphere, but the increase in futures has largely come from weakness in the US Dollar. In figure 1, the spot Chicago futures are shown in both US¢/bu and A$/mt.

The fall in the US$, and the subsequent rise in A$ has led to the increase in A$ wheat swaps being weaker, albeit still reasonable at 3% week on week.

The US$, has been weakening in the past fortnight due to mixed signals from the US administration. The US secretary of state, had made comments pointing towards a weaker US$ being positive for the economy. This sentiment points to the likelihood of limited interest rate rises in the coming year. However, President Trump provided a conflicting view that the dollar will be stronger, and that was the aim of the government.

In figure 2, the US dollar index (DXY) is plotted. The DXY is an index based on a trade weighted basked of currencies against the US$. In recent weeks, the greenback has declined to it’s lowest point since December 2014.

This weakness has flowed through to the A$, which has gained ground to close above 81¢ (figure 3). The improving value of the A$, contributes to making local export commodities less competitive on the world stage, however in theory imports should be cheaper.

The current rise in the A$ is largely as a result of US weakness, and with the unknowns of the political machinations of the white house, we could be in for a rocky period of time. If the market regains confidence in President Trump’s claims of a stronger dollar, we could see a decline in the A$.

What does it mean/next week?:
The market continues to look towards the northern hemisphere. We are currently experiencing La Nina conditions which can lead to a drier than normal conditions in the US, this is starting to be seen.

We are still a long way from the finish line when it comes to the US crop, but signs are point towards relatively poor conditions, and with low planting figures any issue can be exacerbated.