Investors are closely watching the central banks' interest rate decisions. The market has priced in a significant probability of a policy change by the Bank of Japan (BoJ) in March.

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Since 2023, the U.S. dollar has oscillated within a 101 to 108 range, with a potential head-and-shoulders (H&S) top formation emerging. The recent decline from the formation's right shoulder is poised to test the neckline support once more.

Since early 2022, USD/CNH has repeatedly tested its trendline support without breaching it. However, if the U.S. dollar's weakness were to persist, it could precipitate a decisive break below this support, marking a significant shift in the pair's trajectory.

Gold has significantly breached a formidable multi-year resistance level, achieving a new all-time high. Recent consolidation has built substantial momentum, suggesting that the upward trend may extend considerably further.

Since November 2023, Soybean Meal experienced a pronounced downtrend without significant rebound attempts. A recent breakout above the downtrend channel hints at a potential reversal.

The latest Commitment of Traders (COT) report reveals unprecedented positioning: Commercials have accumulated the largest long positions on record, while speculators hold historically high short positions. Such extremes are uncommon and typically precede bottoms and significant price reversals.

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"All that winter the crannogman stayed on the isle, but when the spring broke he heard the wide world calling and knew the time had come to leave." – George R.R. Martin, A Storm of Swords

We, too, find ourselves at the cusp of a new season, literally and metaphorically. March heralds the arrival of cherry blossom season in Japan, where the vivid blooming of Sakura symbolizes the awakening of spring, breathing new life into the world. This imagery invites us to ponder: Has winter come to an end for commodities? The emerging trends indeed suggest so.

Over recent quarters, the equity market has captivated the spotlight, showcasing a remarkable V-shaped recovery in the U.S. equity markets, predominantly led by A.I.-enhanced technology giants – dubbed the “Magnificent Seven.” Conversely, the commodity market, which endured a tumultuous journey from the pandemic's outset through 2022, seemed to have been relegated to the background. With volatility diminishing, most of the commodity sector remained trading within a narrow range throughout much of 2023, particularly agricultural commodities, which saw a consistent decline in recent months.

However, the constancy of change is a principle that applies universally; volatility often returns to its mean, and extended trends invariably reverse — sometimes abruptly and markedly, due to market complacency and overcrowding. We are witnessing a paradigm shift across various key financial assets, beginning with the U.S. dollar. Since 2023, the dollar has exhibited four distinct local peaks within the 100 -– 108 range. It has rolled over again, as the market anticipates rate cuts by the Federal Reserve as early as June, signaling not only an end to the hiking cycle but also the onset of rate cuts.

Amidst this backdrop, gold has emerged as one of the first commodities to break through a formidable multi-year resistance. Several factors contribute to gold's bullish momentum, including the U.S. dollar's weakness and the decline in real yields, as explored in our recent research paper Through the Lens of Gold. This depreciation of the dollar significantly influences other commodities, making them more affordable for international importers, thus boosting consumption, demand, and ultimately, prices. This scenario also underscores the intrinsic value of these real assets, which get revalued in dollar terms as the currency's value fluctuates.

Moreover, we observe other metals, such as silver and copper, poised to break out from years of symmetrical triangle price consolidation. The energy sector, too, has seen an upside breakout after over a year of range-bound trading. Agricultural commodities, however, have captured our utmost attention. For instance, Soybean Meal has plummeted more than 25% in less than four months, with the weekly charts displaying consecutive red candlesticks. Yet, an examination of the Commitment of Traders (COT) report reveals an unprecedented scenario: Commercials are holding the largest long positions in history, while speculators are markedly short. This unusual positioning, particularly the commercials' long stance, suggests anticipation of price reversals by the producers and other physical commodity players with inherent hedging needs, potentially leading to high volatility if the trend reversal continues and short speculative positions are rapidly closed.

The vast landscape of commodities softly beckons. It is time for investors and traders to shift their focus, embracing significantly skewed risk/reward opportunities.

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We consider expressing our views via the following hypothetical trades¹:

Case study 1: Long Soybean Meal futures

We would consider taking a long position in the Soybean Meal futures (ZMK4) at the current level of 336, with a stop-loss below the recent low of 323, which could bring us a hypothetical maximum loss of 336 – 323 = 13 points. Looking at Figure 4, if the trend reversal continues, Soybean Meal price has the potential to rise to 380, a hypothetical gain of 380 – 336 = 44 points. Each Soybean Meal futures contract represents 100 short tons of soybean meal. Each point move is 100 USD.

Case study 1: Short USD/CNH futures

We would consider taking a short position in the USD/CNH futures (CNHH4) at the current level of 7.1980, with a stop-loss above the recent high of 7.2280, which could bring us a hypothetical maximum loss of 7.2280 – 7.1980 = 0.03 points. Looking at Figure 2, if the uptrend support is broken and the U.S. dollar continues to weaken against the Chinese yuan, this pair has the potential to fall to 6.7000, a hypothetical gain of 7.1980 – 6.7000 = 0.498 points. Each USD/CNH futures contract represents 100,000 USD. Each point move is 100,000 CNH.

¹ Examples cited above are for illustration only and shall not be construed as investment recommendations or advice. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. Please refer to full disclaimers at the end of the commentary.

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