AS TEMPERATURES plunged across Europe and much of the US last week, the price of orange juice futures was far from frozen. Bitterly cold temperatures and a rare frost in Florida sent the price of March 2010 futures surging to a two-year high of 151.15 cents. The contract surged as much as 18 per cent in a matter of days, ending last week at 146.25 cents, compared to the 134 cents at which it started the year.
But the sharp impact of the cold snap on the price of orange juice looks to be dissipating. The contract sank 10 per cent in early US trading as traders digested fresh news that the freeze was only expected to have affected 5 per cent of the state’s output for the year, rather than the 10 per cent damage initially estimated.
Typically, citrus fruits are damaged if temperatures fall below -2C, because frost-affected fruits rot when temperatures return to normal. In Florida, some temperatures had remained below this critical level for several hours.
As the orange juice futures market is quite small, such unanticipated weather events can make it extremely volatile for contracts for difference (CFD) traders to get involved in, as last week’s events showed. What’s more, its small size means it doesn’t take much outside interest for financial flows – as opposed to trading by the citrus industry – to start driving the direction of the market.
Those looking for short-term profits from orange juice might well be disappointed. The InterContinental Exchange (ICE), which provides the futures market, automatically suspends trading if there is a move of 10 cents or more in either direction from the opening price. The recent conditions saw the ICE extend this to 20 cents but it nonetheless remains a difficult market to day trade.
But those with a slightly longer view might have more success. Ole Hansen, senior manger of CFDs and listed products at Saxo Bank, says that the price of frozen concentrated orange juice will continue to remain supported. “All the fundamentals have been in favour of the orange juice price continuing to go higher – from a drought that lasted until May 2009 to yellow dragon disease [a citrus-tree destroying bacterium that has recently been seen as a huge threat to Florida’s growers] slashing output.”
Also putting upward pressure on the orange juice price, says Hansen, is the prospect of US legislation on how much artificial sugar can be added to soft drinks. Orange juice would not be affected by any such ruling, and may even benefit as consumers switch away from fizzy drinks towards juices – “It doesn’t take a big change in consuming patterns to boost demand quite dramatically,” he adds.
Warmer weather might be forecast for the coming weeks but this is unlikely to derail the steady climb of orange juice futures, making a long bet on the March 2010 contract still a worthwhile trade. And should the cold weather continue such that citrus crops are seriously affected, you will also benefit from spikes in the price.
CFD PROFILE | HANG SENG
Spread: 25 points
Min/Max size of trade: 1/2,500 futures
Margin Requirement: one per cent
Trading hours: 01:45- 04:30 and 06:30- 08:15 GMT
Information provided by GFT
China’s growth story is having a positive impact on the Hang Seng. The index has climbed nearly two thirds since March last year. News that China’s exports increased by a record amount in December helped boost the index this week. Markets now expect Asia’s largest economy to experience double digit growth this year, which is also good news for the index due to its proximity to China. There could be further upside for the Hang Seng as it is still below the peak it reached at the end of 2007.
CFD ANALYST PICKS
My pick: Pending Dow breakout, remain short crude from $81.25
Expertise: Combining fundamental and technical analysis with risk management
Average time frame of trades: 1 day to 1 week
For the past two months, the Dow has remained within a tight range of 300 points. And, though there is a gentle slope to the index, the lack of a serious trend will not keep up for much longer. I would prefer a bearish break. Levels aren’t as important as momentum, but I am looking at 10,625 and 10,250. Also, I remain short crude oil. A run this consistent begs for a reversal.
My pick: Buy NIKKEI 225 at the market
Expertise: Global macro
Average time frame of trades: 3 months
A combination of lower borrowing costs with a more competitive US dollar/yen exchange rate will probably boost Japanese stocks going forward. Indeed, the Bank of Japan is expected to leave the benchmark interest rate low for quite some time. A widening of the interest rate differential between the United States and Japan is likely to bring the yen under heavy selling pressure, which is good news for Japan’s exporting companies.
My pick: Short crude oil (pending)
Expertise: Global macro, classic technical analysis
Average time frame of trades: 1 week – 6 months
Oil is positioned to decline after it tested a resistance level at the top of a rising channel that has guided prices since June 2009 (and now stands at $86.30). Prices are showing negative divergence with volume and relative strength indicators.
We will look for signs of a bearish reversal candlestick formation at the resistance level and enter a short position, initially targeting $82 per barrel.