Aud-Nzd, my bullish view
23 August 2021
An interesting spread on coffee
9 September 2021
I receive several emails every day, and I have to thank the traders who write to me because they give me great food for thought and analysis every time. Today, as the title says, I want to speak to you of a singular characteristic of the feeder cattle, that only this commodity has.
I take my cue from an email written to me by Luca, an Italian trader. Luca asked me on Monday for my opinion on a spread, exactly GFU21-GFV21. The spread was and still is, very interesting when analysed as I usually do.
Below is the chart of the spread with 5- and 15-year seasonal patterns, as it looked on Monday.
Undoubtedly, from this and the Continuous histogram chart below, the price is low even though the seasonal patterns show a lot of volatility.
Fundamental analysis, which I won't go into in this article, agrees with a rise in the price of the underlying asset, and therefore the spread. So, everything is pointing to a future rise in the spread, but my response to Luca was: I personally would never trade this spread. Let's look at the reasons.
First of all, the maturity of the spread. The first delivery (although as you will see later this term is not correct) is September and the last day of futures trading is 30 September. Therefore, there is still little time to trade the spread and in the last two-three weeks (at least) before the delivery, the Non-Commercial begin to move on the next delivery with consequent decrease of the volumes and increase of the volatility.
Then, there is one aspect that caught my attention. The underlying has been rising strongly for some months. I would have expected a term structure in backwardation or, at most, in slight contango. Instead...
For deliveries in 2021, the term structure is in strong contango. How is this possible? The expiry in 4 weeks of the September contract, and the consequent shift of Non-Commercial to October delivery, is not the reason.
The answer is in the title. Feeder cattle has a characteristic that no other commodity has: there is no physical delivery of the underlying. Each contract is financially settled and this leads to both futures and feeder cattle spreads having very nervous movements that do not follow seasonal patterns (which are also not always very clear).
This is because Commercial only have the interest in fixing the price at the various futures maturities. Below is the chart of the spread three days later.
The price decreased again, making the spread, theoretically, even more attractive. What I expect from now until the end of September is high volatility with strong movements in either direction.
For those who know me and know how little I love risk, this spread, as I said to Luca, is for me untradeable. However, it has helped me to explain another aspect of the fascinating world of commodities.
Today, as the title says, I want to speak to you of a singular characteristic of the feeder cattle, that only this commodity has. I take my cue from an email written to me by an Italian trader
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.
