Origins took advantage of the last rally

Equity markets have been threading water not far from the highs, reacting positively on news of stimulus and any better chances of an agreement between China and USA or negatively when the hope fades on both fronts.

The FOMC lowered interest rates by 25 bps (now at 1.75% to 2%), but Powel did not sign on further cuts, unless a negative impact/shock comes up.

The overnight borrowing rate in the US jumped last week forcing he FED to run its first repo operation in eleven years to provide cash to financial institutions, an event that seems to be punctual based on calendar needs for money.

Brazil cutting interest rates to the lowest ever, 5.50%, likely to further decrease the official rate given the poor growth and lack of inflation, drives away money on the carry, as the spread gets “tighter” against major currencies, and it shall keep the BRL in check until the government passes other reforms – the tax one is the next expected to move forward, but not necessarily in 2019.

Commodities have been more volatile after the jump of crude and energy related raw materials, but the CRB has started to fill the gap it left a week ago.

NY Coffee is back below US$ 1 per pound and London is near US$ 1,300 a ton as speculators are no longer on short-covering mode and the strength of the greenback attracted more commercial selling.

Fundamental Focus

The “C” lost ground quickly last week on forecasts of rains in Brazil on a timely fashion as the wet season usually starts towards the end of September/beginning of October.

Key technical support levels being broken brought back speculators on the sell side, but commercial selling was also noted in good volume on the recent rally the market had.

In the last COT report, the gross-short of commercials, largely representing origins sales, increased by 10,001 contracts, or 2.84 million bags, between September 11 and 17. Funds bought 11,393 lots, or 3.23 million bags, of their shorts and the market fell $ 1.25 cents per pound – a negative reading that might attract more selling.

As rains shall start falling this week in Brazil the marketplace might get less anxious, but we shall continue to monitor as after the trees flower more precipitation will be needed. As of now some weather institutes are not seeing significant rains towards the first half of October, but the models are not as accurate for such a “long” term.

CONAB has revised downward the estimate of the current crop (19/20) for Brazil last week. According to the entity the country harvested 48.99 million bags, being 34.47 million arabica and 14.52 conilon.

Without any demerit to the official number, it is good to note that the perception of the market is that the crop is at least 10% higher than reported, which is why the board did not pay attention at the figures and kept the negative price trajectory.

A respected European bank told the newswires that the World S&D has a total deficit of 4.1 million bags on the currency cycle, while the 2018/2019 had a surplus of 6.9 million bags. The financial institution believes prices shall gravitate towards US$ 105 cents per pound.

In the USA 125,134 bags were added to inventories in August, as per the GCA, totaling 7,224.309 bags, or the highest level since August 2017.

With differentials still relatively rich at the origins one can make a point that at the peak of seasonal consumption in the Northern Hemisphere the usage of coffee seating at destinations shall increase – assuming that the qualities are commercially attractive.

A move under US$ 98 cents per pound shall attract more technical selling into the market, likely testing the low range of the 93.40 to 105 interval that we have seen arabica trading since July.

Technical Focus

December19 contract in NY might be drawing a head-and-shoulder figure, especially if it moves towards the 93/95 support area and then trading sideways for some time. Resistance levels are at 101.00, 102.60 and 104.95 cents per pound. London November contract has first support at 1,287, followed by 1,262 and 1,212 (the low of March 15th, 2010). On the upside we shall observe 1,327, 1,374 and 1,440 dollars per ton.

Wishing you a pleasant week,

Rodrigo Costa

Skype: rodrigoccosta10

WhatsApp: +1 646 468 7091