Weekly Outlook: One Week Until Obamanomics

Right or wrong we expect more government involvement with this administration, which ultimately means troubles will arise and there will be no immediate fix to the current difficulties. With the first full week of trading under our belt in '09, traders step back and access what this year will bring. We’re not expecting the V type of action, 6 months of commodity prices trending higher and then a reversal and 6 months lower, but we are anticipating plenty of volatility. As opposed to feeling vulnerable we look forward to the volatility as it should present many an opportunity. We will try to keep all informed through our daily blogs, in addition to our weekly commentary and also attempt to issue 1-2 specific markets reports per month. Look in the next few days for our '08 review and '09 outlook and most likely next week a special Euro-dollar report.

Currencies

The BoE reduced its interest rate from 2.00% to 1.50%, the lowest level in the Bank's 314 year history. The March British pound was up 587 ticks as most analysts were expecting a deeper cut. Not only did we get the cut right, but we were looking for a move higher as well. Sometimes it pays to be a contrarian, unfortunately we didn’t participate, but hopefully some of you did. There should be some follow through this week as long as any pullbacks hold 1.4650. The next leg higher should make an attempt at 1.5600. We are looking to potentially purchase some inexpensive calls but want to see a little more evidence.

The European Commission said that consumer confidence fell from 74.9 to 67.1 in December, the lowest reading since the index began in '85. Last week the Euro lost 474 ticks and is down 638 ticks in the last 2 weeks. For now we would suggest playing the breakout above 1.3810 or below 1.3250 on the March contract as we favor the downside, but will not try to outsmart the market. The ECB is scheduled to meet this week and we expect a reduction of rates of 50 basis points taking rates to 2.0%.

The March Swissie lost 276 ticks last week. If you look back to last week’s commentary, we called a move to .8900 that should be bought, lo and behold if traders had executed this strategy they had a 3 day window to see a $3750 appreciation per contract with a max drawdown of $375. We would currently be positioned on the sidelines expecting a move lower and will get confirmation of that on a trade below .8870 this week. Resistance is at .9080 and support comes in between .8700 and .8750.

The March Aussie lost 90 ticks last week breaking the positive streak from the prior 4 weeks. We are convinced that eventually we will see 90 cents, although be patient and wait for a long entry on a setback. Resistance is seen at .7150 and current support at .6725. Ideally we will be looking for a long entry between .6400-.6550.

The Japanese yen gained 184 ticks as it appears the risk aversion trade is back in play. As forecast early last week the yen traded down to 1.06; see last week’s commentary. On the week we had a 535 tick trading range so options may be the more appropriate vehicle. We are pricing out strategies in both February and March calls; outrights and spreads. Support is seen at 1.09 and resistance at 1.1160.

The Loonie gained 129 ticks and if you played the breakout we recommended last week, you got long at .8325 and covered at .8500 gaining $1750 per contract and are now flat. We would focus on energies and metals this week to determine direction and because our sentiment there we favor a move lower. Support is seen at .8325 and resistance at .8525.

The Kiwi was able to pick up 36 ticks last week, keeping the streak alive, gaining the last 6 weeks. We are still shopping for long entries from the mid 50’s and have no exposure for clients currently.

The US dollar was 1 tick shy of gaining a penny last week. The 100 day moving average has acted as a magnet the last few sessions as the dollar tries to make up its mind on direction. Support is seen at 82.00 followed by 81.25 and resistance is seen at 84.00 followed by 85.50. We are expecting a move up to 85.50 over the next few weeks and will be positioning clients in currencies and other commodities with the assertion in mind.

Grains

Corn: March corn made a higher high last week but failed to follow through, closing 1 ½ cents lower. Monday the USDA will release its monthly crop report with average pre-report trade guesses having corn production for '08 at 11.982b.b., down from the last report of 12.020. Ending stocks, due to the decreased usage, are expected to come in at 1.489b.b. vs. 1.474 last month. More important than the crop report this week could be the weather in South America. Argentina and Brazil remain too dry to help early emerging corn crops.

The report should be friendly, but on a surprise bearish reaction or precipitation in South America we could see a move down between 3.55/3.70. Support is seen at 3.90 with resistance at 4.30. We still have clients in the option/futures strategy from 2 weeks ago at a slight profit looking to react depending on the movement this week. (Sold May 4.30 calls, bought March 4.10 puts and long March futures just under 4.00.)

Beans: March soybeans were 56 ½ cents higher last week and on the charts there is no real resistance until $11. We have been advising clients to work out of their longs, lightening up, taking profit on the way up to lessen exposure in case of any surprises on Monday’s USDA report. The average pre-report guess puts production for '08 at 2.910b.b. vs. 2.921 on the last report. Ending stocks are expected to come in at 186m.b., down 19 m.b. from the December report. The report is expected to be mildly bullish making the recent weather in South America even more critical. March soybeans have advanced $2.50 since the first week of December and if we get some precipitation over the next few days we could see a steep correction, albeit short lived.

We have advised clients to take 2/3 of the recent trade recommendation off. We advised clients to buy back the May calls at a loss (approx. $1200) and to exit the long futures at a profit (approx. $3275). We are still holding March puts looking to exit on a setback. Current support comes in at 9.80 followed by 9.50; on a move to these levels we would most likely cover the remaining puts and potentially look to re-establish longs.

Wheat: March CBOT wheat picked up 16 ½ cents last week. Resistance is seen at last week’s double top of 6.46 with support at 5.95 followed by 5.80. On a move lower in corn and soybeans we expect CBOT to trade down between 5.40/5.55. March KCBOT picked up 18 cents last week. Resistance is seen at 6.70 with support at 6.25 followed by 6.10. On a set back look for a long entry with stops below 5.40. The KCBOT/CBOT March spread closed last week at 21 ½ cents premium to KCBOT. We still like the trade with stops on a close only basis below 15 cents and a target of 45/50 cents.

Monday’s USDA report for wheat has pre-report trade estimations for winter wheat planting at 44.178m.a. down from 46.181 last year. The average trade estimate for ending stocks inventory is 600m.b. vs. 623 last month. Most of this should already be priced in with wheat continuing to look for guidance from corn and soybeans. Weather has also played a role in the pricing of wheat, not solely corn and soybeans. Argentina will reap the smallest wheat harvest since '89 after weather conditions curbed yields. The crop will be no more than 8.7 million tons, down at least 5.4% from a previous forecast.

Softs

Dow Jones Newswires reported that Brazil's government estimate of the upcoming '09 coffee crop is 37.8 million bags, down from last season's 51 million bags. March coffee ended higher by 600 points last week. We put on a trade last week for clients going long the futures while simultaneously selling March 120 calls and purchasing 110 puts. This strategy allows us to take advantage of a price spike up to 125 that we anticipate while also mitigating the risk. Volume is staring to pick up as well as last Tuesday when prices were up over 7 cents over 20,000 contracts were traded while we had been averaging 10,000 per day. Support is seen between 110.50 and 112 with resistance at 118 to 121.50. As we work out of these March positions we will be looking at long exposure in May and September.

March sugar closed up 12 ticks last week trading intra-week at its highest level in 2 months. On the daily charts prices are overbought so we may see some profit taking short-term. Even with an interim correction we still expect a move to 13 cents in March. On any significant pullback we will advise clients to load up on July and or October calls. With an expected deficit in '09 and a rebound in oil we have a bullish bias and see a favorable risk/reward dynamic.

Ghana and the Ivory Coast are experiencing a stretch of hot and dry weather that may continue to stress the cocoa crop. March cocoa closed $62 higher last week and we expect to see a break out of the triangle formation this or next week. We have seen selling near the highs the last 4 weeks and on a push higher in the dollar the break out may well be to the downside. We are currently in March options short the 2500 calls, short the 3200 calls and long 3 times as many 2800 calls. We’ll possibly exit the 2800 calls and hold the 2500 and 3200’s depending on action early in the week.

Even though the ten day forecast for central Florida remains safely warm, March orange juice closed up 5.70 cents, up 8% on bargain hunting. Resistance is at 80 cents and support is at 74.25. We are long futures with at the money puts and for new entries we still like this strategy. We are looking for a close above the 40 day moving average this week at 77.43 which has not occurred since July 23rd.

March cotton was 1.24 cents higher last week and has been positive for the last 5 weeks. Resistance comes in at 51.00 which should serve as an interim top without bullish news from the USDA Monday. We are expecting a move down to 44/45 cents. Support is at the 9 day moving average at 48.90 which we have not closed below since December 12th.