Watch out for Brazilian real next week, top trader tells ag investors

Next week could be a crucial one for agricultural commodity traders, particularly of the likes of coffee and sugar, thanks to the potential for bringing volatility in the key currency of the real, a leading trader said.

Eddie Tofpik, head of foreign exchange at ADM Investor Services, part of the empire of ag trading giant Archer Daniels Midland, told the AgriRisk Forum that a fightback by the dollar against the Brazilian real "has seemingly run out of steam".

The dollar - having recovered from a 15-month low of R$3.1011 to $1 in late October to R$3.5071 two weeks ago – "is holding back" from further gains, he said.

"I don't know why."

 'Bow-tie'

While charts, which he said were crucial for successful foreign exchange trading, were suggesting that the market could be on the verge of signalling a so-called "bow-tie", which would be a bullish signal for the dollar, trading patterns between December 6-13 would determine whether in fact this was the case.

These dates were critical thanks to signals obtained from another technical analysis technique, the the Andrews and the Schiff pitchforks, whose so-called "tines" – lines derived from price trends – would meet, an occasion which can often signal market swings.

"When they cross over, there is usually volatility and a change of trend," Mr Tofpik told the forum, in London.

This, he believed, would determine whether the Brazilian currency would renew its revival from its record low of R$4.2482 to $1 reached in September last year, or revert to weakness.

'Almost a perfect relationship'

The real is closely watched by agricultural commodity traders given Brazil's importance in the sector, but in particular for traders in coffee and sugar, of which the country is the top producer and exporter, with the nation a leading shipper in soybeans and corn too.

A stronger real lifts the value – in terms of dollars, including of New York's dollar-denominated futures - of the likes of coffee and sugar, with weakness in Brazil's currency hurting futures prices.

Indeed, separately, Tom Copple, economist at the International Coffee Organization, told the conference that there had in recent months been "almost a perfect relationship" between the real-dollar exchange rate and coffee prices.

'Negligent or an idiot'

Mr Tofpik underlined views, previously voiced to Agrimoney.com, of the importance of chart analysis in analysing markets such as foreign exchange, saying that investors who ignored technical analysis were either "negligent or an idiot".

Analysts of market fundamentals were "people with rucksacks on their backs, with wires," a grouping that Mr Copple admitted that he belonged to.

"I stay away from these people," Mr Tofpik said.