DIFFERENTIALS STILL POINTING HIGHER
The US job market created more jobs than expected in November and with housing and the stock markets doing fine it is not surprising to see a strong consumer confidence index.
The FOMC therefore shall remain in pause mode of further rate cuts since not even the tariffs imposed on imports from China dented the economy just yet – well, it was helped by the return of ease monetary policy in 2019, no doubt about it.
Commodity indices are heading towards the end of the year with positive returns driven by strong performances of energy raw materials and with arabica coffee being among the winners.
The “C” contract not only finds good support on punctual negative moves, but also it recovers quickly making sequential positive days – even though it has been quite choppy on intraday sessions.
London is lagging behind even though it is now over US$ 200 per ton above the low seen in mid-October, and the robusta contract shall end the year with losses, unlike Arabica, taking the arbitrage between the two varieties to US$ 65 cents per pound – the weakest since December 2016.
Fundamental Focus
The marketplace has been questioning how much fundamentals have changed for a 35% appreciation of the board from October 17th until today.
Bulls were sure that the future market was due for a strong rally based on the limited offer/availability (?) on the current crop year (given Brazil off-cycle) and the unsustainable price levels that the market was trading at, hurting the farmers in general.
Bears, many injured after such a rapid and sharp reversal of the trend, point to the significant devaluation of the currencies of the two main origins and now most believe that producers are finally getting paid to cover their costs and have some profit – if not all, the majority.
It is hard to say where this market will stop in the near term as we might see more moves like today and also because the amount of volume traded at the origins shall diminish as we get near the holidays – in some cases farmers might halt some selling to manage income tax for the year.
Also, in Brazil there is less coffee available to sell after the first US$ 30 cents move, both on the spot and on forward crops, therefore we shall see less selling of board in the next, say, US$ 30 cents/lb. – if it happens.
On the other hand, producers in Central America and Colombia shall increasingly have more coffee available, being able to negotiate their crops at much better levels than many thought, probably lowering the basis from now on.
The newswires have been saying that the rally is happening because the market is lacking quality coffee, which is why it is demanding certified coffees, but the quality of the stocks is not necessarily a substitute for fresh-milds.
ICE inventories diminished 122,000 bags in November, being now near 2 million bags – compared with 2.5 million last March, but the exchange reported 34k bags pending grading – meaning that it is not a one-way street.
As I wrote two weeks ago, I think that the combination of certs usage with the structure coming in and important moving averages / long-term downtrend lines being pierced have triggered the funds to cover shorts and get long for the first time since April 2017.
On the COT Supplemental report, the non-commercials shall be already net-long about 3K/5k, while on other report formats the managed-money category has been long for three weeks.
Commercials gross-short reached a new record, in any format released by the US agency, with the equivalent of 52.3 million bags and 54.68 million bags short, in two of the most followed reports.
The long side of commercials, albeit below the record, is well above the historical average, giving breath and time to those seeking for coverage.
If differentials at origins can be used as a guidance for the continuation or not of the rally, the likelihood for further gains are higher still.
Technical Focus
The 2nd month continuous chart settled today above a downtrend line traced from the highs of November 2014 and June 2016. Next upside objectives for Mar20 would be 133.50, 140.35 and 145.70 and support levels are at 125.00, 123.10 and US$ 115.65 cents/lb. Oh, one extra thing the market is in overbought territory. London is inside an ascendant triangle near the vertex that for the week has the resistance at 1422 and support at 1392. Other upside points to be observed are 1447,1493, and 1511 and on the downside 1385, 1344 and 1333 USD/ton.
Wishing you a pleasant week,
Rodrigo Costa
Skype: rodrigoccosta10
WhatsApp: +1 646 468 7091