Looking to the Futures

A former Bank of Japan (BOJ) official, Masaaki Kaizuka, went on record to state the BOJ is highly expected to raise their benchmark interest rate this month to avoid falling behind on inflation control.  Kaizuka said, “If I were the governor of the BOJ, I would say it is time to take action. The war is exacerbating economic inflation, which increases the risks of the bank lagging behind the yield curve.” 

The latest economic indicators released by the BOJ would also be supportive of a rate hike. The current BOJ Governor, Kazuo Ueda made comments that real interest rates are clearly negative which in turn keep the country’s financial conditions accommodative. He further mentioned an increase in fiscal spending could result in crowding out private investment by pushing up market interest rates. 

As Ueda makes increasingly more hawkish comments, we’ve seen traders’ position through swaps in a way that they are pricing a roughly 70% probability of a hike. If the BOJ were to hike their target benchmark rate 25 basis points to 1 percent, this would be the highest mark in 31 years since 1995. 

This accumulated pressure to hike is widely attributed to the Iran War through price and elevated inflation pressures caused by energy assets.  Although there was no downgrade to their regional economic assessment, elevated oil prices pose a substantial risk towards BOJ’s ability to control inflation.  Price growth has tracked right at the central bank’s 2 percent target. Governor Ueda ended his remarks by stating that any sharp escalation in the war or policy shock ahead of their meeting could derail current plans. 

In light of these comments from Governor Ueda hoping for minimal policy variance amongst the Iran War, U.S. President Trump announced a ceasefire brokered by Pakistani Prime Minister Shehbaz Sharif.  This announcement, which was acknowledged by the U.S. Iran and Israel, caused Light Sweet Crude Oil Futures (/CL) to retract yesterday from roughly 117 to the mid 90’s in price.  U.S. President Trump also went a step further by threatening a 50 percent additional non-negotiable tariffs to any nations aiding Iran. 

Although the 10-point peace plan has a two-week negotiation period amidst the ceasefire, the main disagreement between parties remains to be the Strait of Hormuz.  Iran recently reopened the Strait and is now reportedly demanding bitcoin as payment for their 2 million toll fee per tanker. 

Crude volatility and price shocks remain the key risk factors towards the BOJ straying from their rate hike path. With 20 percent of the world’s oil passing through the Strait of Hormuz, the BOJ will be forced to monitor the geopolitical negotiations between the U.S. and Iran. 

According to the CFTC Commitment of Trader’s Report, open interest has increased ever so slightly. Leveraged funds remain short 123,414 contracts of the 345,275 in open interest representing the largest positioning. Dealers and asset managers are pretty evenly split in their positioning between long and short. 

Live cattle futures have jumped over a previous level of resistance at the February 19th close of 243.375. The June contract reaches a high of 248.45 on Monday and has seen a possible technical sell off after reaching overbought levels on the relative strength index (RSI). Current RSI for the future based on the activity from yesterday shows a level slightly under the 70 overbought level at 67.6189. 

The June contract shows a strong up trend that started after the future was priced lower than the 200-day simple moving average (SMA) on March 9th. Cattle prices have rallied nearly 10% since finding support at the 200-day SMA after reaching a low of 227.325. The 9-day SMA and the 21-day exponential moving average (EMA) both have crossed over the 50-day SMA, with the 20-day SMA, slightly below the 50-day SMA. The Hightower Report Daily Livestock Technical Summary shows the next downside objective is now at 243.920. The next area of resistance is around 246.90 and 248.350, while 1st support hits today at 244.70 and below there at 243.92.
 

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