WEAK BRL REMINDS US OF 2001

Equities across the globe paused the meltdown seen on Monday, last week, as it seems like the markets are looking to navigate through a new reality of tariffs in an ocean of liquidity that eventually could ease even further if something bad arises again.

Maybe a lack of alternatives could be the justification for blind-buying indices that replicate the exposure on stocks, but the fact that the Dollar Index strengthened hints that investors see the US suffering less than everyone else.

Commodities bounced nicely also from the sell-off with grains and energy being the lead gainers, while silver, gold and sugar were the ones losing ground.

Coffee in five days is virtually at the same level, with the market trading from 92.55 and 88.45, in New York and 1410 and 1292, in London.

Fundamental Focus

Jair Bolsonaro’s ability to put himself in unnecessary discussions and confusions – recently attacking the student class in Brazil (one of the main forces behind impeachments that Brazil had had quite a few) – is depleting his political-capital and places in check his governability, including the key pension-fund reform that is dragging the economy into a hole.

The level of uncertainty can get worse as some of the president-supporters are calling for the population to go to the streets to demonstrate his strength – but if the students do not show up, the unemployed people have no money to hop on transportation and the employed ones have to work, imagine how dangerous it can be if the turnout is meagre…

Anyway, Brazil remains the land of the future – some jocularly say it will always be – therefore the market starts to price negatively the risks of the country with the BRL shooting to 4.1211 – still behind R$ 4.2133 from August 30th last year and R$ 4.2478 seen in September 24th, 2015.

Looking at coffee the fear is how a shaky background could create again the shivering scenario of 2001/2002, when the Real devalued steeply, from R$ 2 to R$ 4 in front of the, then, largest Brazilian crop ever (55 mln bags?), leading New York and London to their historical lows, US$ 41.50 cents per pound and US$ 345 per ton, respectively.

No, I do not think that we will see the markets at such levels – if I had to pick numbers I would say the bottom is probably at US$ 85 cents, maybe a little lower, and US$ 1100/1200 per ton for robusta, however if the Real enters in a spiral devaluation these levels need to be revised.

The flow of coffee improved in the main origin and with the harvest advancing there, as well as in Colombia and Peru, more selling will be hitting the board in the next months – which could encourage funds to stay put on their position.

Today’s performance was not bad, especially with London rallying, providing support for NY, besides the BRL weakness.

Rains in the Brazilian coffee belt were plentiful recently and if it continues may hurt quality, maybe another reason for one not to be aggressive on the sell side.

Strong differentials are forcing those who need coffee to cover their needs, after waiting for a window opportunity that hasn’t happened for a long time.

The Colombian congress approved a contribution of US$ 6 cents per pound on the country’s coffee exports and raised the moisture requirements for imports of the product, measures that try to alleviate the crisis suffered by its producers.

On its second estimate for the 2019/2020 Brazil crop CONAB sees total production at 50.92 million bags, of which 36.98 million arabica and 13.9 million conilon – many market participants expect the conilon number to be between 18 and 20 million bags.

Brazilian Central Bank is offering USD through swap deals providing liquidity for those exiting the long position on the greenback, which gives a bit of time for Bolsonaro to, eventually, get his govern together. If the BRL is able to recover, NY shall move up. Another bet can be on the winter in Brazil, but less and less players have the experience of going through a frost as the last occurrence was 22 years ago.

Technical Focus

ICE July contract must respect 87.60 to avoid a test of the 84.00 cent level that we last saw on November 15th, 2004 – on that year the low was 66.00 on January 5th. A closing above 92.25 may trigger some short covering. London has first support at 1267 and resistance at 1407.

Wishing you a nice week,

Best regards,

Rodrigo Costa

Skype: rodrigoccosta10

WhatsApp: +1 646 468 7091