Key Tokyo rubber futures rose to a three-week high on Tuesday, snapping a four-day losing streak as stop orders prompted a wave of short covering in thin volumes.
The key Tokyo Commodity Exchange rubber contract for December delivery <0#JRU:> rose as high as 166.2 yen, the highest for any benchmark since June 15. A 10-yen rise from Monday’s settlement in early afternoon triggered a circuit breaker which enables participants to trade beyond the trigger level after a five-minute halt in trading.
The December rubber contract settled at 161.3 yen on Tuesday, up 5.1 yen or 3.3 percent from Monday’s settlement. It earlier fell to a low of 154.8 yen following a drop in after-hours trade on Monday.
Kazuhiko Saito, chief analyst at Fujitomi Co in Tokyo, said stop orders at 160 yen for the December contract were hit in thin volume of about 3,000 contracts, spurring a wave of short covering that pushed prices higher across the curve, nearly tripling the contract’s volume to around 7,900.
“Players were forced to cover short positions as prices shot up after the stop orders were hit in low volume and nobody could absorb those orders,” he said, adding this was an issue under TOCOM’s new system introduced in May which sped up order transaction response times.
A trader at a Japanese commodity brokerage said stop orders were seen between 159 yen and 163 yen for the December contract.
He said the December contract was also bolstered by resilience in the nearby July contract, in which some traders had built up long positions in the past few days to receive deliveries via the exchange when the contract expires later in the month. The July contract was up 2.7 yen at 163.0 yen.
Saito at Fujitomi said the curve was likely to remain in a contango, where prices of nearby contracts are lower than those further out, once the expiry-related position adjustments are cleared.
Due to slack demand, traders have said it was unlikely that TOCOM’s rubber contracts will see a seasonal backwardation — when prices in nearby contracts trade higher than those for more-distant contracts.
Around this time of the year, backwardation usually deepens when tapping resumes after a lull, tightening supply in nearby contracts as it takes time for supply to hit the market. But traders said any pickup in demand can be still met with ample rubber inventories.
TOCOM prices eased from their intraday highs as the yen held gains against other major currencies on Tuesday. A stronger yen weighs on TOCOM prices as it deflates yen-based futures.
A fall in crude oil CLc1 also dampened sentiment as oil extended falls into the fifth consecutive day on worries about the economy that have brought the stock market rally to a halt and pushed the dollar higher.