On to December
The month is pivotal. It is now peak holiday season, with Thanksgiving, Hanukkah, Christmas. Then come the last day of the calendar year --- and of some fiscal years. And with US corn harvest over, there are pigs o’ plenty. Are there any good spreads to celebrate?
Consider the relationship between Swiss francs and Eurocurrencies. Fiscal years for both Switzerland and the European Monetary Union end in December. As tightly as they are related, how do their currencies treat the end of the year?
The euro has tended to make a seasonal, or at least a significant interim, low in mid November. It then recovers into mid December, hesitates and consolidates, and then continues higher through the end of the year.
The Swiss franc also makes a significant but interim low in mid November. However, it has then typically soared through the end of the year with little hesitation. In fact, MRCI has found that March Swiss Francs have closed higher on about January 25 than on about November 25 in 13 of the last 14 years.
The net effect has been for francs to outperform euros from at least late November into mid December. For example, the Long March Swiss Francs/Short March Eurocurrencies spread has closed more favorably toward francs on about December 16 than on about November 25 in 13 of the last 15 years, with mostly moderate drawdowns. (Each 0.0001 for both currencies is worth US$12.50, although both trade in increments of half that.)
This spread made an at least 30-year high last August when the franc traded at a premium to the euro of 9.94. It then pulled back to 6.61 by mid August and then rallied up to 9.45. It has since pulled back and traded sideways in a two-month long narrowing range --- until this past week when it burst higher to 8.87.
On Friday it pulled back. The last significant low was 7.57. Will the spread consolidate for a couple of days and then test 9.45? Will geopolitical concerns reinforce seasonal influences to force it to break through --- and then test 9.94? Manage risk!
Now consider hogs. Again, because feed is such a primary but variable cost of production, producers want to feed as many animals as possible when feed is inexpensive. For US producers, that would be during and after corn harvest in October/November.
Thus, slaughter weights tend to soar in October as new feed becomes available, and marketings have traditionally peaked in or by early December. As a result, cash hog prices have historically plunged into early December. In fact, MRCI has found that February Hogs have closed lower on about December 11 than on about November 24 in 14 of the last 16 years and in 20 of the last 23.
When a cash market declines, the pressure usually ripples out in futures. The nearby is most affected and then progressively less so into the future. This can especially be true for the hog market, with far fewer hogs marketable in summer and consumption greater. For example, the Long August/Short February Hogs spread has closed more favorably toward August on about December 11 than on about November 26 in 18 of the last 20 years and in 14 of the last 15 --- in only 4 of which would any daily closing drawdown have exceeded 1.05 cents/pound. (Each 1.00 cent/pound is worth $400.)
This spread traded with August at a premium over February as high as 21.15 in July before declining into the end of October when it fell to only 10.07. But with the daily RSI at an oversold 24, it has since bounced. This past week it traded up to 14.20 before pulling back on Friday.
Will it pull back a little farther and then more seriously test the 40-60% retracement zone back up of 14.50-16.72? Whatever, but be sure to manage risk!
If you have not already done so, you are encouraged to visit spread charts.
Please remember: These are NOT trading recommendations. They are intended only as potential ideas based on the market's own performance in the past, but past performance is not necessarily indicative of future results. Futures trading involves substantial risk of loss.
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Trade 'em
Jerry Toepke