At the last week of May, a short one in the United States due to special Memorial Day holiday that also unofficially marks the beginning of the summer, investors decided to sell stocks taking down major US indices, as well as in Europe and Asia – sell May and go away?
The dollar index on Friday gave back most of the gains recently accrued as a result of a renewed bet that the FED will cut interest rates soon, based on the risks of a global slowdown brought on by the trade war with China.
The CRB sank to levels that we last saw at the beginning of January, driven by continued decline in energy commodities and industrial metals, while among the winners ICE Arabica coffee led with 11.2% gains in five sessions, followed by several agricultural commodities – not with the same magnitude.
Robusta stayed a little behind, making the arbitrage to wider to US$ 36 cents per pound.
The rally could not come at a better time for many participants, the roasters, after several have been buying the futures for some time, the merchants, given their need to cover part of their sales and to producers, helping those in Brazil to sell coffee above R$ 400.00 again (far from ideal for them, but better than the recent R$ 360.00) at the moment where the need for money is greater = the harvest.
Flow of businesses increased internally in Brazilian and in other origins many have reported more offers showing up. Price fixation that was being held back, on consignment contracts, were also mentioned, and volumes traded in the exchanges soared.
Replacement got slightly better, but merchants have been more focused on covering their exposures waiting for their buying needs to get satisfied to, then, eventually look on improving the FOB basis – which in my opinion will only happen if NY can make new legs to the upside.
Many Brazilians are reasoning the gains on the lower yields coming out of the farms and lower quality, impaired by rainfall and the uneven maturity of cherries.
If we consider a scenario where the US dollar depreciated sharply, the Real strengthened more than the other emerging currencies and the funds have been liquidating their shorts (not adding to their long position), I find it difficult to credit the rally only to quality and yield issues.
One would notice a general discomfort to bet in much lower prices, as they are low historically speaking, but on the other hand the perception remains that we have enough supply to go through this year of deficit, making very few encouraged to be even more aggressively loading on the buy-side too far out the curve, given the burden on more than 15% to elongate positions – and the potential for a record harvest in Brazil in 20/21.
At the Coffee Dinner in São Paulo, last week, everyone was happy with the recent gains of the board and hoping that not only it could sustain, but that the gains could be further extended.
The beginning of the Brazilian winter and the behavior of traders that have been selling every rally (which did not work on Friday, forcing short-term guys to rush and cover their shorts after the “C” failed to sink in the last half of the session) shall keep volatility high – somehow welcomed for prop desks after several months of a boredom market.
Since the rally began two weeks ago with frost fears triggering then technical stop-losses that brought managed-money to diminish their exposure, we have to think if fundamentals have changed to justify a trend-change, of if eventually the market was just wrong going ahead of itself to “pre-sell” a record 20/21 Brazilian crop and a carry-over that has been getting bigger – maybe suggesting a higher 18/19 crop.
At least it will get a lot more interesting from here.
As long as ICE arabica July contract respects US$ 99.50 cents per pound bulls might still have stamina in trying to take prices to the 200-day moving average at 107.20 (fyi: second-month continuous chart shows the 200-day moving average at 103.90). London first support level is 1267 and resistance at 1407.
I am looking forward to seeing some of you in Berlin at the World of Coffee – feel free to text me or call if you have some spare time.
Wishing you a nice week,
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