The expansion of the Coronavirus is affecting commodity currencies as well as the energy sector, writes Andy Waldock.

The Coronavirus has taken center stage in the marketplace. The initial response is an economic contraction, not just here, but globally. Commodity producing countries like Canada and Australia saw their currencies get hit the hardest while the production of the physical goods in Japan supported the Japanese yen.

The drop in the Canadian dollar continued as forecast, with the market closing below the upward sloping trend line that had supported the market since the December low. Now, we’ll watch the upward sloping trend line from January 2019, which comes in around .7450 for support above multi-year lows.

Like most markets last week, the grain markets also contracted. The soybean oil short sale continues to work, and the Kansas City wheat reversed lower, right on cue. This week, we expect Chicago wheat to follow suit. Subscribers will receive updated stop loss and profit target information.

The hidden value in the grain markets may be a further flush in the soybean market. The November 2019 soybean futures built up good support on the continuation chart around $8.50 per bushel. The three-week decline in the soybean market has not gone unnoticed by soybean processors. A further decline in soybean futures will attract more speculative short-selling interest. We believe this is likely to be a short trap. The commercial processor bid is banking on panic to shake out the market and facilitate industrial purchases ahead of seasonal strength later this month. Keep an eye on the soybean market.

cot table

Moving to the metals, we can see just how schizophrenic the markets have become. Traditionally, gold and silver attract a bid in times of fear. While gold managed a gain, silver closed nearly unchanged. It appears that the precious metal bid is running out of new buyers. The gold market reached the highest speculative concentration of long positions since November 2012, and the speculative COT ratio in silver now stands at nearly 5:1. Five to one is the most imbalanced speculative position we’ve seen since May of 2004. Given the financial markets’ current state of volatility, I wouldn’t be surprised to see silver and gold make a run at their highs. However, I do expect any new gains to be capped quickly, with silver being the most likely to reverse lower upon the realization that there are no more buyers.

Energy Sector

Shifting to the energy markets, we got about precisely what we were expecting. crude oil couldn’t hold the trend line support tested Jan. 24 and has continued to decline towards $50 per barrel. The crude oil market has now dropped by more than 20% in three weeks, and refiners are starting to take notice. Energy processors and distributors all came in on the buy-side as the current declines in the energy markets prove too significant a bargain to pass up.

Lastly, we must finish with a note on the hog market. Hogs declined by more than 15% since Tuesday’s high. This was a new low for the April contract, and nearly so for July. Note that the July contract bounced back Friday to close mid-range. We still expect a global protein shortage as the Asian swine flu makes its way through South East Asia. Travel restrictions caused by the Coronavirus could help mitigate swine flu spread as well, directly through less activity and contact. However, the two are entirely separate biological organisms. Therefore, commercial traders see the correlational sell-off in the hog market as a buying opportunity. Commercial buying has pushed their momentum into positive territory, and last week’s action left the April and July contracts in oversold status. This is precisely the combination we look for when predicting reversals. We’ll watch the hog market for buying opportunities.

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