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Is the CDN$... doing what Cattle futures recently?

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    Is the CDN$... doing what Cattle futures recently?

    Up and Down it goes... when it slows down... nobody knows! Trading Currency is like a roller coaster... with blind fold firmly in place!!! If you think you have it figured out... THINK AGAIN!!!


    "DTN Newsom on the Market
    Crossed Words

    Darin Newsom DTN Senior Analyst
    Bio | Email | Blog
    Fri Feb 5, 2016 06:18 AM CST
    The importance of words was brought to light again this week as I engaged in a number of conversations on the social media site Twitter. It started innocently enough as I mentioned John Harrington's latest brilliant Sort and Cull blog post titled "The Blinding Truth About Cattle Futures." In his own style -- one that brings to mind both Mark Twain and Will Rogers -- John started his piece off with a clear-cut conclusion: "Cattle futures are seriously broken."


    Market terms can be puzzling, with different people attaching different meanings to the same word. (DTN illustration by Darin Newsom/Nick Scalise)
    My sharing John's column sparked a discussion between those in the cattle business (as John described them, "commercials 'playing it safe' on this strange game board taking a longer road to financial ruin") and those who trade cattle futures for a living ("wild and wooly speculators, born and bred riverboat gamblers who are absolutely addicted to the unknown"). It should come as no surprise that the former think cattle markets are indeed broken, as John does, while the latter see it only as a market doing what it "should" (more on this word later).

    Let's define what makes a "broken" market. In the beginning, futures contracts were designed as a tool of passing off price risk starting with the producer of a cash commodity and progressing all the way through large cash commodity merchandisers to floor traders on one of Chicago's exchanges. The key relationship in all of this was that between the futures market and the cash market, or in other words -- basis. This allowed producers to hedge price risk in the futures market with a general idea of what basis would be at some point in the future. Changes in basis usually occurred as a result of changes in the cash commodities supply and demand, either real or imagined (e.g. harvest, weather scares, export sales, etc.).

    Therefore, a futures market that is broken is one that has lost contact with its underlying cash market. Those arguing against this idea suggested we were just in an active period, that in time the market would adjust. My reply: So what? That doesn't mean the market isn't broken now.

    If we go back to 2008 and use Chicago wheat as an example (though Kansas City and Minneapolis were also broken), we see national average basis fell to $2.35 under (the DTN National SRW Index was priced $2.35 cents under the nearby futures contract). The futures market was a perfect picture of insanity as domestic and global supplies were growing by leaps and bounds yet noncommercial (speculative) traders were driving the SRW futures market toward $13.50. Yes, you read that right, $13.50. Futures spreads (price difference between contracts) were in a strong carry (the nearby contract priced below the next deferred contract, the opposite of an inverse), also reflecting the commercial side's unwillingness to go along with speculation run amok.

    Fast forward back to today's cattle markets and any given day can see live cattle move the daily limit $3.00 and feeder cattle $4.50, in either direction, though underlying fundamentals (supply and demand) remain unchanged. Old market triggers like this past week's U.S. Plains and Midwest blizzard would have garnered a great deal of attention in days gone by, but this time around created hardly a buzz. Instead, this week has seen some of the calmest cattle futures trade in months. Go figure.

    Others pointed out that just because a market is difficult, doesn't make it broken. If markets were easy, some said, everyone would win. Again I disagree. From a technical (chart-based analysis) point of view, the cattle markets have never been easier. The monthly charts for both live and feeder cattle are near-perfect examples of markets moving from Elliott 3-Wave downtrends to 5-Wave uptrends, with trends being nothing more than price direction over time.

    If this isn't enough to make grizzled veterans of the livestock trade laugh, I don't know what is. For decades, livestock contracts basically ignored Sir Isaac Newton's First Law of Motion, still the basis of nearly all technical analysis when rewritten as "A trending market will stay in that trend until acted upon by an outside force." Livestock traders had little to no use for charts, and with good reason, for the futures markets were driven by cash markets. Those who understood cash trade understood the market. Period. But such is not the case today. One has to be well-versed in the study of algorithms to understand what makes cattle move day to day.

    Now comes the issue of "should." Commentators like to say how markets "should" or "shouldn't" behave; the latest example a headline from a widely read online financial market site Thursday morning "Crude Oil Shouldn't Be Rallying." In markets there is no should, because a market does what it will.

    So how do I reconcile these two competing ideas (markets are broken; but markets do what they will)? Simple -- one doesn't actually negate the other. Markets can misbehave, to the point of being broken, before ultimately coming back to more rational behavior. A futures market that ignores its supply and demand long enough eventually ceases to exist because commercial traders refuse to take part any longer. Wheat faced that challenge and came back around, so did cotton to a certain degree. Time will tell about cattle futures. Both could be destined to a fate of regional cash trade only, or over-the-counter futures contracts traded away from electronic control of standard futures.

    One last word pet peeve of mine and I'll close for the week. Make a new drinking game when analysts use the words "positive" or "negative." These terms are ridiculous in analysis, meaning "bullish" (something that makes prices go up) or "bearish" (something that makes prices go down), respectively. Think of it this way, a sharp sell-off (or rally) in any commodity can be positive or negative, depending on whether one is buying or selling.

    Darin Newsom can be reached at darin.newsom@dtn.com

    Follow him on Twitter @DarinNewsom"

    #2
    Just looking at the CDN$vsUS... The Charts... like 5 year... sure look like we are headed... to .68 by March 1... but as the above says in Darin's article... rational markets are NOT a result of QE and negative interest rates... ESPECIALLY Currency!

    Comment


      #3
      Trump vs Clinton;
      or

      Cruz vs Saunders...

      US$ could be really volatile...

      Trump vs Clinton; most likely outcome... would be really entertaining to see this battle!!!

      Comment


        #4
        Would like to see Trump vs Sanders.

        Comment


          #5
          don't think comparing C$ futures to live cattle futures is really valid. The Canadian dollar has an active trade that is open and transparent on a daily basis and the futures market responds to that well with fairly minor changes based on expectations of the market participants. Live cattle on the other hand do not have the transparency or volume in the cash market thus making the futures market much more subject to wider swings that may not seem right at the time. probably less than 10 percent of cattle processed on a weekly basis are traded in a negotiated cash market and it is likely less than that in Canada

          Comment


            #6
            Fundamental Forecast for CAD: Bearish

            Canada’s Dollar Faces Key Price Test as Oil has stalled its rise and the US Dollar’s next move is uncertain as many arguments arise about Fed hikes in 2016.
            Canadian Dollar unlikely to gain further at prior pace versus US Dollar per the Speculative Sentiment Index
            Canadian Dollar Strength Halted As Friday’s News Announcements Renew Fear of BoC Action
            This week’s moves have put the Bank of Canada, and CAD traders in a precarious position. From the Bank of Canada’s position, you have a stronger currency as the CAD continued rallying this week while at the same time, the data is showing less stability in the economy. Should this trend continue, we’ll eagerly look to the March 9th Bank of Canada meeting for a less confident tone from Stephen Poloz, which could continue the weak CAD theme.

            Friday quelled many of the traders who thought the CAD would continue strengthening without rest. In fact, many commodity currencies end the Friday near lows of the day as the supportive US economic data rekindles thoughts about a rate hike from the Fed could further hamper commodities and global trade.

            Canadian unemployment rose as Alberta, home of Athabasca tar sands, had the highest unemployment since 1996. The Employment change of -5,700 was a disappointing follow-up to January’s 24,100 job gain. In addition to the employment number the housing starts missed survey estimates of by a large margin of 20,000.

            Suggested Reading: WTI Crude Oil Price Forecast: Oil Bulls May Soon Have Reason to Cheer

            Next week, the economic prints carry less significance than we just saw that could leave a bad taste in traders and the Bank of Canada’s mouth. The important data next week will be in the manufacturing industry that has been much less robust than the exporting side of the economy that the Bank of Canada praised as resilient on the back of a weaker Canadian Dollar.

            http://finance.yahoo.com/news/highest-unemployment-rate-2yrs-stalls-023300466.html

            Comment


              #7
              Still a big disconnect with Canadian dollar and crude oil.
              We hear that traders consider our dollar to be a petro currency but support only two or three per cent increase versus $US in next few years.
              Crude oil, on the other hand, futures say forty to fifty per cent increase over same time.
              Unable to get a good explanation as to why.

              Comment


                #8
                Perhaps traders do not trust Bank of Canada and our government not to follow policy to keep our dollar low.

                Comment


                  #9
                  “Paper money eventually returns to its intrinsic value – zero.” (Voltaire, 1694-1778) Often Rather Quickly

                  Comment


                    #10
                    Originally posted by Hopalong View Post
                    Still a big disconnect with Canadian dollar and crude oil.
                    We hear that traders consider our dollar to be a petro currency but support only two or three per cent increase versus $US in next few years.
                    Crude oil, on the other hand, futures say forty to fifty per cent increase over same time.
                    Unable to get a good explanation as to why.
                    You have to apply a ratio to get a valid comparison.
                    As an example, right now the CAD is at 71.99 cents and oil is $30.89.
                    If oil doubled to $61.78 would you expect the dollar to go to 143.98 cents?

                    Comment


                      #11
                      I wouldn't expect the dollar to rise but rest assured a liter of gas will be at 1.50.

                      Comment


                        #12
                        Thanks, farming101.
                        Think ratio is overdone.
                        Have heard that oil is not more than ten per cent of our economy so that is a factor as well.
                        Lack of confidence in our government and rest of economy could explain aberration.

                        Comment

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