It is shaping up to be the biggest in recorded history. But even if the El Niño currently heating up the waters off the coasts of Central and South America fails to make the record books, it is already causing problems. Big Pacific typhoons, last week’s super-hurricane Patricia, and drought in the Robusta coffee-growing regions of Vietnam are just a few of the recent manifestations of this weather phenomenon. We expect many more to follow.
This giant El Niño is still growing in both size and intensity. The map below (abnormally warm waters in red) from the National Oceanic and Atmospheric Administration (NOAA) in Boulder Colorado shows the size and scope of the current El Niño with warmer waters extending as far north as Mexico and abnormally cool waters dominating Equatorial Australia, Indonesia and parts of Southeast Asia.
The biggest effects of El Niño are generally not felt until January and February and often include drought, floods, fires and disrupted crop cycles across the globe. Typical El Niño patterns include warmer, wet winters in Western and Southwestern North America as well as corresponding drought conditions in both the Western Pacific (including wheat-growing Australia) and parts of sugar & coffee-growing Brazil.
El Niño is a tropical phenomenon. It makes sense that it usually affects tropical crops the most. Using this logic, we suggested buying long-dated call options on both sugar and cotton in the first of our Big Move Trade Alerts covering El Niño back in July (Click here to read.) The two charts below show the progress of these markets since then.
Cotton remains sideways, holding support at the 57-58 cents per pound level. Like sugar, this market is oversold and overdue for a corrective rally. The March 2017 75-cent and 80-cent calls we suggested purchasing for roughly $900 and $800 respectively haven’t budged. We still like cotton long-term and are suggesting that our trading customers hang on. Those without a bullish, long-term position in cotton may want to consider either of these calls at current levels. Our long-term target remains $1.00 per pound.
Sugar is priced in US dollars. Selling from stockpiles helps Brazilian farmers convert their depreciating Brazilian Reals into dollars. This has kept pressure on the market despite supply concerns. But sugar is looking better despite exchange rate pressure. The sweet stuff broke its long-term downtrend last Friday and appears ready to mount a more sustained effort to the upside. An El Niño-induced supply disruption in either Brazil or India could power prices much higher.
The March 2017 15-cent calls we suggested purchasing for $950 back in July closed Friday, October 23rd for $1,321.60. We recommend holding these calls for an eventual move to our long-term target of 20-cents per pound in the March 2017 futures contract. RMB Group trading customers without a bullish position in this market may want to consider purchasing long-dated calls with slightly higher strike prices. Contact your personal RMB Group broker for our latest recommendations. (See contact info at the end of this report.)
Moment of Truth for the Euro
The common currency has traded in a sideways pattern since our recommendation to use March 2016 put options to get short in our July Big Move Trade Alert. (Click here to read again.) With the Fed poised to raise interest rates and European Central Bank president Mario Draghi promising even more stimulus, the euro could finally be ready to break out to the downside. If it does, we expect our $1.00 (parity) target to be reached in fairly short order.
The March 2016 $1.0000 / $1.0400 bear put spreads that we suggested purchasing for $800 or less closed Friday at $725. Friday’s close back below the euro’s 38-week moving average is encouraging, so we will stay with this position for a while longer.
If the combination of European stimulus and an American interest rate increase can’t get this market to follow through to the downside, we doubt anything can. That’s why we need to be ready to exit on a Friday close over our risk point at $1.1720 in the front month futures contract.
You need a futures account to trade the recommendations updated in this report. The RMB Group has been helping their customers trade futures and options since 1984 and are very familiar with this strategy. Call us toll-free at 800-345-7026 or 312-373-4970 direct to learn more. We’ll send you everything you need to get started. You can also visit www.rmbgroup.com to open an account online.
If you are new to futures and options and want to learn more about them, download the “RMB Short Course in Futures and Options” – our easy-to-read booklet covering all the basics. Go to our website www.rmbgroup.com. Click the “Education Tools” tab at the top of the home page, scroll down to find the report and click on it.