Crop Year, an aspect to consider in spread trading
11 February 2021
How I work in Forex: Nzd-Usd analysis
20 April 2021
I received a message from a trader asking for my opinion on the CCU21-CCZ21 spread. In this article, I am going to analyse the spread using my method of analysis.
First of all, it is a spread that I have included in my book on the best spreads for 2021. It is a bearish spread, so to sell and has more than one possible entry-level. Below, you can see the chart with the 5- and 15-year seasonal patterns.
Below is also the chart showing the first two short entry dates on the spread.
The trader who wrote this message had opened a short position in February and closed it at the beginning of April. He now wishes to reopen the short to take advantage of the continuation of the bearish seasonality.
Before moving on to see the most interesting areas in which to sell the spread, I will make a brief analysis.
The spread is in a normal contango situation, looking at the contango histogram the current value is within the 25th-75th percentile range. A rebound in price would push the spread into the extreme right-hand columns with subsequent room to reach the highest columns of the contango distribution in the -25/-35 area (which is also my target for the whole operation, although this should be assessed as the days go by).
The price, although I do not show the chart, is at a medium-low level, so a good bounce is likely in the coming days. Finally, the news on cocoa is not very comforting. European cocoa bean usage has declined slightly during Q4 of 2020 compared to Q3 due to the resurgence of COVID-19 infections. Cocoa bean usage in the EU during Q1 of 2021 will be lower due to the rise in new infections, death rates, and sluggish vaccine rollouts. In the 2020/21 season, cocoa production projections are higher due to increased output from vital producers Ivory Coast and Ghana.
In conclusion, a rebound in the price of the spread is likely, but the seasonality and the underlying situation remain bearish. So, back to that trader's question, where to open bearish positions on CCU21-CCZ21? Below you can see the chart with the first three price-sensitive areas highlighted.
The choice will depend very much on the strength of the rebound. Personally, I would wait for the price to reach at least the second zone, $ 4-7 area, however, opening the spread even at the first level has a fairly low risk. One dollar of price movement corresponds to $10 of gain or loss, so a possible initial loss of a $100-120 if the price reaches the third area. A positive price means that the spread is in backwardation.
I received a message from a trader asking for my opinion on the CCU21-CCZ21 spread. In this article, I am going to analyse the spread using my method of analysis. First of all, it is a spread that I have
I am a macroeconomic and financial analyst with over 30 years’ experience, including two years as a fund manager. I specialise in currencies and commodities, and I am the author of several successful books on trading, macroeconomics, and financial markets.
