ICE weekly outlook: Canola overdue for a setback

(Dave Bedard photo)

CNS Canada –– ICE Futures Canada canola futures ended lower during the week ended Wednesday, as the market was overdue for a setback.

Canola futures have outpaced outside oilseed markets to the upside in recent weeks, but have hit resistance and are now due for some weakness, analysts say.

“What was supporting canola was spread trading. Funds were buying the canola, selling the beans as a spread, and that was really persistent,” said Errol Anderson of ProMarket Communications in Calgary.

That spreading started to unwind as speculators liquidated their very large long position, causing canola to move sharply lower Wednesday. The March contract broke below the $450 per tonne level, which is likely to trigger follow-through selling going forward.

“It’ll be fast and hard going down. I think the downside risk is between $15 and $30 per tonne, somewhere in there,” Anderson added.

The weak Canadian dollar has also been underpinning the canola market lately, but Anderson said he believes the loonie doesn’t have much downside left.

“The U.S. dollar, if anything, its due for a setback, and what would trigger a setback in the U.S. dollar is some negative economic data coming out of the U.S. in February and March, which I am expecting,” he added.

“It’s not that Canada has changed, and crude oil is rallying or anything — it’s just that the U.S. dollar will likely slip back and the commodity-based currencies like the loonie will jump a bit.”

The fundamental situation for canola also remains bearish, as there’s no shortage of supplies, which will weigh on prices going forward.

Statistics Canada will release its latest stocks report next Wednesday (Feb. 4), which will indicate stocks as of Dec. 31, 2014. If there’s a surprisingly small number, the market could move higher for a short period of time.

In the end, demand, not supply, will be key going forward for canola, according to Anderson.

“We’re seeing a break in some global values now, and I am expecting that, heading into the late winter, the demand from China and Japan is going to slow a bit.”

— Terryn Shiells writes for Commodity News Service Canada, a Winnipeg company specializing in grain and commodity market reporting.

 

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