Fresh from the Trading Room: Breaking Points

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The breakdown in equities over the past few weeks has been unavoidable. The latest move has brought the Russell 2000 back to April 2024 levels, wiping out a 25% rally.

A breakout and retest of a rising wedge has pushed feeder cattle prices to an all-time high.

As a result, the Feeder Cattle–Live Cattle spread is now trading at an all-time high, surpassing the 2014 spike.

AUD/JPY has now broken its four-year uptrend with its recent move lower.

Zooming out, the breakdown in the uptrend marks the start of a potential downtrend within the multi-decade trading range.

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While equities remain under pressure, feeder cattle, much like gold, has been steadily inching toward another all-time high.

Much of this strength can be attributed to supply constraints, as persistent drought conditions in key cattle-producing regions have limited herd expansion. Additionally, restrictive import policies from Mexico—historically a major supplier of feeder calves—have further tightened supply. However, the most critical factor driving feeder cattle prices higher over the past two years has been the decline in feed costs.

Feedlots, which purchase young cattle (feeder cattle) and fatten them until they reach slaughter weight, are highly sensitive to feed costs—primarily corn and soybean meal, their largest operating expense. When feed prices decline, the cost of finishing cattle drops, allowing feedlots to pay more for feeder cattle while maintaining profitability. This increased willingness to bid higher sends upward pressure on feeder cattle prices, contributing to the recent rally.

As a result, the Feeder-to-Live Cattle spread has reached an all-time high. Historically, extreme levels in this spread have tended to mean-revert, often aligning with shifts in feed costs and demand dynamics for finished cattle. The last significant spike in this spread occurred in 2014, after which a sharp reversal brought it back in line with the long-term trend.

In our view, the downtrend in corn and soybean meal, which began in 2023, appears to be nearing an end. As we previously identified, corn is forming an ascending triangle, while soybean meal may be bottoming out. Both inputs are currently trading near long-term support levels. Should a rally in corn and soybean meal materialize, feed costs will rise, reducing the attractiveness of feeder cattle and potentially narrowing the Feeder-to-Live Cattle spread.

Beyond commodities, the monetary policy divergence between Australia and Japan presents an interesting opportunity. The Reserve Bank of Australia (RBA) has begun an easing cycle, cutting rates by 25bps to 4.10% in February, with further cuts still undecided as inflation moderates and growth slows. Meanwhile, the Bank of Japan (BOJ) has taken the opposite path, raising rates to 0.5%, the highest level in 17 years. While the BOJ left rates unchanged in its latest meeting, it is noteworthy that Japan’s core inflation has exceeded 2% for 33 consecutive months, keeping the door open for further policy normalization.

In contrast, the RBA, set to meet on April 1, remains cautious on inflation, citing uncertainties such as rising global trade tensions under President Trump’s second term. Historically, such uncertainty has benefited the yen as a safe-haven currency, making it more attractive relative to commodity-sensitive currencies like the Australian dollar.

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We conclude with the following hypothetical trades:¹:

Case Study 1: Short Feeder Cattle futures, long Live Cattle futures

We would consider taking a short position in the price spread between Feeder Cattle (GFQ5) and Live Cattle (LEQ5). Looking at the Aug contract for both futures, the current price spread trades at 91.60, with a stop loss at 105, a hypothetical maximum loss of 105-91.6 = 13.4 points. Looking at Figure 3, if the spread reverts to the long term mean of roughly 35 is confirmed, it results in 56.6 points.

Each Feeder Cattle futures contract represents 50,000 pounds, and each point move is 500 USD while each Live Cattle futures contract represents 40,000 pounds, and each point move is 400 USD.

Since the contract size is different, to construct a hedge position, we would match four Feeder Cattle futures to five Live Cattle futures, in such a case a one point move in the spread would be 2000 USD.

To understand how this translates to P/L, lets walk through a hypothetical scenario to see how the P&L might be calculated:

Assuming the spread falls to 56.60 driven by a fall in cattle prices

This is also equivalent to using the change in spread price multiplied by point value:

(91.60 - 56.60) x 2,000 = 70,000 USD

Or

Assuming the spread rallies to 105 driven by a rally in Cattle Prices

Which is also equivalent to the change in spread price multiplied by the point value:

(91.60 – 105.00) x 2000 = -26,800 USD

Case Study 2: Short Australian Dollar/Japanese Yen futures

We would consider taking a short position in Australian Dollar/Japanese Yen futures (AJYM5) at the current price of 94.02, with a stop-loss below 97.60, a hypothetical maximum loss of 97.60 – 94.02 = 3.58 points. Looking at Figure 5, if the breakdown of the uptrend is confirmed, Australian dollar/Japanese yen prices have the potential to reach 85.8, resulting in 94.02 – 85.8 = 8.22 points. Each point move in the Australian Dollar/Japanese Yen futures contract is 200,000 JPY.

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We explored the gold rally in Q1, which recently hit the take-profit level. This trade worked out well, as the highlighted breakout from the symmetrical triangle led to a subsequent and rapid rally. Alongside this, the U.S. dollar weakened by approximately 4.7% over the duration of the trade, while market sentiment shifted toward fear, as measured by the Fear & Greed Index and rising volatility. These factors further reinforced the safe-haven appeal of gold.

The long Nikkei 225 Index trade was quickly stopped out after failing to break above resistance. During the trade, the export-dependent Nikkei 225 faced headwinds as the yen appreciated, negatively impacting the index. Additionally, the Bank of Japan raised interest rates, further strengthening the yen and adding pressure to Japanese equities.

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Crude oil prices have once again found support near the $66 level. At this point, prices are on the verge of breaking the descending triangle pattern, leaving the door open for further downside potential.

Heating oil is now at the convergence of multiple patterns, suggesting an imminent significant move. The current long-term support at $2.1500 has proven to be a decisive marker for the next directional move.

Soybean futures are currently consolidating near multi-decade support, maintaining a critical technical level.

The rising channel for soybean oil was decisively broken, and prices have now returned to the support level.

Zooming out, soybean oil remains well above its long-term uptrend.

Soybean meal is also trading near long term support.

As we previously pointed out, live cattle has broken out of their 15-month ascending triangle, reaching a new all-time high shortly after.

The spectacular rally in gold has now pushed it above the upper band of the rising channel.

Silver’s recent surge has convincingly cleared the previous resistance at $33.

Since 2014, the Chinese yuan has displayed three episodes of significant appreciation against the USD upon breaking its uptrend. After a failed breakout in 2024, the pair is once again trending lower.

The nine-year support for EUR/GBP is holding, as the currency pair bounces off support.

The Mexican peso is slowly grinding higher after forming a five-month rounding bottom, signalling a potential reversal.

The multi-decade symmetrical triangle continues to consolidate as it nears both the apex and the 1,000 mark. The eventual breakout will likely be a key watchpoint.

The recent weakness in the Nikkei 225 pushed it below the rectangle range we previously identified. The current retest of resistance will determine the next decisive move.

The S&P 500 Index has broken below its 200-day moving average. Past breaks below this level have typically resulted in either a quick rebound or a significant move lower.

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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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