U.S and Australian meteorology forecast EI Nino effects - FX put options or commodity or weather derivatives to rescue

All major veteran weather forecasters have revised up the probability of a major El Niño effects this year (especially during December). The U.S. Climate Prediction Centre now putting the probability of an El Niño event this winter at 95% and the Australian Bureau of Meteorology this week saying that indicators are at levels not seen since the 1997-98 El Niño.

The impact of El Nino in primary commodity markets is significantly positive for commodity prices generally and for food prices in particular. In isolation, these effects should simply play out as a positive terms of trade shock for countries that are large primary commodity producers/net exporters. Among G20 space, these are New Zealand, Australia, and Canada. Clearly, however, price effects are only part of the story during a supply shock that has diverse geographical impacts.

What's this EI Nino, let's shed some light:

El Nino is an abnormal weather phenomenon typically in late December due to warm water from the western Pacific Ocean flows eastward which would have varying weather natural glitches.

Major victims & beneficiaries and recommendations:

In G20 space, Australia, New Zealand, and Japan all suffer significant output losses from El Niño events. However, for some countries, El Niño is growth enhancing-notably the US, Canada, and Europe. The likely impact and find diverse effects amongst the major commodity producers (agricultural commodities in specific) and would expect adverse APAC FX effects as a result.

It is suggested that a hedge against a major event in FX options. It is suggested that the biggest FX effects from a major El Niño event would likely come through the interaction of terms of trade changes and commodity volume effects.

Returns during previous El Niño events, and effects in other markets, suggest that a strong 2015 event would be bullish for CAD but bearish for AUD and NZD.

We recommend AUD/CAD put spreads are the way to position for, or hedge against agricultural commodities or could even be pacific regional weather derivatives at El Nino risk.