By IFCMarkets
Good afternoon, dear investors. Today we consider the short position investment of a spread instrument, which is based on the portfolio quoting of agricultural commodity futures and the euro against the Russian ruble. The futures traded on the Chicago Mercantile Exchange (CME) are included in the portfolio: live cattle, frozen beef and soybeans. We remind you that the Russian President signed a decree №560 banning a list of agricultural products from the United States, European Union, Canada, Australia, and Norway on August 6, 2014. The list of banned agricultural products includes cattle meat, meat products, vegetables/fruits and etc. On August 20, Russian Government reduced the list by eliminating such marginal products for Russian consumption as: dairy products, seed potato, sweet corn, peas, dietary supplements and vitamins.
Note that in 2013 Russia imported agricultural products and provisions from the U.S. and the EU in the amount of $1.3 billion and $16 billion, respectively. Thus, first of all, the imports reduction will affect the economic relations with the EU and will result in temporary euro depreciation. The part of the unclaimed products will probably remain on the EU internal market: investors will expect a drop in farmers’ income and job cuts. At the moment, this figure has already amounted to more than 130,000 people. The effect will have an impact on the volume of investment in the EU agricultural sector.
It should be emphasized that the volume of beef exports into Russia from the United States exceeded $300 million in 2012. Undoubtedly, the Russian market is considered to be promising for the US agricultural sector. The ban on chicken imports will result in a more internal competitive meat market. A decline in demand for meat products as a consequence will lead to an oversupply in the US domestic market. A temporary meat prices drop will also allow American consumers to forego a part of high soybean foods, lowering the domestic demand for this product and the price of the relevant futures. Only the Russian ruble, which strengthened slightly against the dollar after the 6 of August, and Russian agricultural sector will be influenced by the short-term positive effect of the food embargo. We should notice the high spirits experienced by Russian MPs. The described trends (especially economic ones) are reflected in the behavior of a spread instrument considered today.
Let us make use of the situation described above for profitable investment in a portfolio of short positions. We build a paired spread instrument in NetTradeX trading platform using the GeWorko model: [F-CATTLE+L-CATTLE+SOYB+EUR]/[RUB]. The core portfolio contains futures on frozen beef F-CATTLE, live cattle L-CATTLE and soybeans SOYB with the same weights of capital invested. We have also included the European currency, which characterizes the macroeconomic impact of the EU embargo on food. Russian ruble is selected as the quoted part – the only short-term winner. NetTradeX program can automatically calculate the value of the core and the quoted parts of the instrument in relation to the American dollar. The synthetic spread selling is identical to the portfolio selling F-CATTLE(25%) + L-CATTLE(25%) + SOYB(25%) + EUR(25%) and the simultaneous buying of RUB(100%). The net profit is composed as the sum of profits for both positions. Here the share of the capital invested expressed as a percentage ($). Note that the quoting allows diversifying risks of the short position, and at the same time to increase the intensity of the instrument reaction on the fundamental impact of sanctions.
The weekly chart of the portfolio spread was built in NetTradeX. Only the open and close prices of the daily candlestick are used for the calculation acceleration.
Free Reports:
We can see that the Russian food embargo, applied on August 6, led to the confirmation of the weekly downtrend and the daily channel formation. The next key level for a pending sell order to be placed was crossed at 0.99724. Thus, the position can be opened immediately: we can talk about the continuation of the bearish daily trend. There is an additional RSI signal – the support breach 43%, which increases the confidence in the trend direction. It is reasonable to limit the risks at 1.01026, which is confirmed by the trend line and Bill Williams fractal.
After position opening, Trailing Stop is to be moved after the ParabolicSAR values, near the next fractal peak – trend following strategy. Thus, we are changing the probable profit/loss ratio to the breakeven point.
More information about the mechanism of portfolio operations is available on our website section “Quick Guide for Creating and Trading PCI”. You can follow us on Facebook by clicking here.
Market Analysis provided by IFCMarkets