As the United Kingdom goes to the polls, in a referendum on the country’s future in Europe, London cocoa traders might be in an unusual win-win situation.
Commerzbank suggested that whatever the outcome of the vote, cocoa futures in London are “more likely to rise than fall”.
An expected downward shock to sterling would support cocoa futures in the case of a so-called Brexit, while a broad commodity rally will add upward pressure
Market on tenterhooks
Traders around the world have been closely watching the outcome of the referendum in the UK.
The economic uncertainty generated by a ‘leave’ vote is widely seen as bearish for equity and commodity markets.
Demand for cocoa is closely linked to consumer spending power around the world, and Brexit has weighed on New York markets.
But a ‘leave’ vote would also drive a rapid sell-off in the UK’s currency, which would be supportive for sterling-denominated cocoa futures markets in London.
The question of whether the UK will leave the EU is too close to call, according to polling companies and pundits.
But after a wobble late last week, currency markets seem to have decided that the chances of UK voting to leave are minimal.
“Before polling stations opened this morning in the UK, sterling appreciated to a six-month high against the US dollar, signalling a deep sense of complacency on the market – which is pretty amazing considering the tight opinion polls,” said Commerzbank.
So sterling has a lot to lose if the UK votes to leave, and little to gain if it remains.
This leaves the London cocoa market, and other sterling-denominated commodities such as London wheat, in a unique situation.
“The significantly weaker pound that would result from a Brexit would probably overcompensate for the anticipated price weakness on the commodities markets and could even drive the cocoa price in sterling up,” said Commerzbank.
Commerzbank suggested that, in London at least, “cocoa is more likely to rise than fall, no matter what the outcome of the referendum is,” although it added that sterling strength could cap any ‘remain’ rallies.
September London cocoa futures were down 0.6% on the day, at £22.50 a tonne.
November London wheat futures are down 1.3% on the day, at a four-month low of £115.00 a tonne.
(Source – http://www.agrimoney.com/news/brexit-poll-could-be-win-win-for-london-cocoa-traders–9687.html)c