And NY trades below US$ 1 again

President Mario signaled ease monetary policy to be announced already on the next September meeting of the ECB, and while he did not give much details, market participants believe in lower interest rates followed by new asset purchases.

The region’s two main economies, Germany and Italy, have been experiencing slow growth and economic indicators showing production cooling off.

In the United States GDP growth in the second quarter of the year was higher than expected helped by strong consumption – despite macroeconomic uncertainties.

With stimulus coming from other G7 economies the US dollar strengthened sharply in the past ten days, as the market had already priced a rate cut between 0.25% and 0.50% on the FOMC meeting that ends this Wednesday.

Stock markets remain strong with the S&P500 hitting new highs, but commodity indices had moved lower in the end of July, after rising at the middle of the month.

Coffee in New York was also impacted by the pressure on most of the raw materials that compound the CRB, with the “C” trading again below US$ 100 cents per pound in the past two sessions.

Fundamental Focus

The “mild” Brazilian winter has encouraged selling on both arabica and robusta contracts, even more so after news from Brazil reporting relatively small losses on the frost occurred during the weekend of July 7th.

According to a report distributed by a respected international trading company, the potential of the 2020/2021 crop has been reduced by 2% (for arabica), or around 1 million bags (depending on what one believes to be the potential). Some representatives of the Brazilian producers have mentioned losses that can reach up to 2 million bags.

Summer in the northern hemisphere, with high temperatures in both North America and Europe, as well as traders taking vacations, contribute to a seasonal lower demand, providing a bit less support for prices.

At the same time as we are approaching the end of the harvest from the main origin the need to generate cash from producers diminishes and as we are also a few months away from mild-coffee crops we might experience a slow flow of beans if New York does not move up.

In other words, differentials are narrowing again, and the rally that we saw three weeks ago was a good window of opportunity to cover short positions.

One note is worth mentioning though, the winter is not over yet in Brazil and other cold fronts could spike the market again – as a matter of fact today’s rebound from the lows was influenced by forecasts of a cold weekend (on the 3rd) throughout the beginning of next week.

The most current CFTC report showed funds with a short position of “only” 24,000 lots, net, or 56,000, gross-short, well below the 78,000 and 121,000, respectively, that they had in early May.

If the chart had not returned to a technically negative picture, bulls could say that speculators would eventually get excited to get long in the market – despite the burden of the contango and the perception of comfortable supply.

As is not the case, and to worsen commodities in general has fallen, it would not be surprising to see new shorts entering the market after the cold weather disperses, even more so with lower interest rates on a commodity that has a carry of almost 14% per year.

On the other hand, bulls may say that the commercial’s long position is near the lowest level since December 2018 – as per Friday’s COT their gross-long stands at 125,865 contracts, or 39,083 contracts less than, for example, April 2 (164,948 lots).

The data may suggest that little or nothing has been added to the long-coverage of these participants’ – flat-price wise speaking (futures) – thus generating a buying need that should be uncovered sooner or later.

In short: the funds may sell, but they will find commercials providing some support.

The question thought is how aggressive will funds eventually sell the market comparing to the buying power of the roasters …

Technical Focus

NY September19 contract is trading below a support line drawn from May and June lows. A move and a settlement above 104.50 shall find short-term buy-stops with targets on the upside at 106.40 and 108.00. Support areas are at 98.75, followed by 96.25, 95.00 and US$ 92.65 cents per pound. The second month chart, now represented by Dec19, has the 200day moving average at 104.05 – a bit below todays settlement (104.75). London Sep19 had an outside reversal day today and will find next resistance areas at 1397, 1413 and 1436. On the downside levels to be observed are 1321, 1311 and 1284 dollars per ton.

Wishing you a nice week,

Rodrigo Costa

Skype: rodrigoccosta10

WhatsApp: +1 646 468 7091