Trend reversal shall only come on july 2020

With the United States saying to be close in finalizing the first part of its trade deal with China and earnings for the third quarter in general better than expected the NASDAQ and the S&P500 reached new all-time highs.

President Trump seems to be running out of choices and has gotten into China’s strategy, which extends as far as it can a full deal perhaps waiting for an adverse outcome in next year’s elections that could reverse the pressure of the US.

China’s promise to import US$ 40 to 50 billion worth of US agricultural products now seem to be back on the table only if current tariffs are lowered and the December new round of taxes is suspended – let the clock tick.

In Brazil the Senate’s approval of pension reform gave the Real breath, with the dollar trading below R$ 4.00 for the first time since last August.

Further strengthening of the Brazilian currency might be jeopardized by protests in Chile and maybe, more important, the result of the Argentine elections, where the left wing won with a default taking shape for the beginning of the new administration.

Fundamental Focus

Arabica coffee responded to the appreciation of the Real gaining US$ 4.15 cents per pound in the past five sessions, technically settling positively on Friday and today.

London has followed NY rallying even more on Monday after it triggered stops from managed money. As funds were holding a record short position the move is welcomed with the proximity of the new Vietnamese crop, where differentials remain high, but somehow limited by Indonesia offers at similar levels.

In Brazil irregular rains and below average precipitation in October are getting the bulls fired up, not only by the price recovery but with the overall sentiment that a sub US$ 1.00 market is not sustainable for the long run.

In fact, the BRL seems to be the main reason behind the hike of the “C” and further gains shall depend on it. For Central America, Colombia and those who are short basis it would be nice to see a continuation of the rally, or better saying, it would be good for everyone.

On the physical side of the business an increase flow of beans is expected as the harvest looms for mild coffees producers, even though (unfortunately) prices are currently hurting Honduras, Nicaragua, El Salvador, and Peru, among others – the lack of alternative to generate cash shall bring sales to the terminal regardless – if this will it be enough to cap funds technical buying spree is a different question.

Recent data of inventory seated at destination ports/warehouses raises a question mark on the more enthusiast voices about demand growth, always the tricky side of the equation. Record exports have taken stocks up recently, just before the beginning of higher seasonal demand, therefore it maybe too early to touch this point as peak consumption happens from now on, but It shall be followed anyway.

For the very short term we can see New York rise a little higher if the dollar does not strengthen sharply and with funds being exposed to the upside after the recoup of both coffee exchanges. Options’ implied volatility were muted on Friday, but moved up today, a positive sign that could still give some more gas to the market.

Medium-term wise speaking though we believe the market will still be trading within the same range, 90 to 110 in NY, until, say, July 2020, when we might see a trend change.

At the peak of the harvest, with a good portion of coffee being fixed then and the marketplace starting to take into consideration the downward cycle of Brazilian production (to 2021/2022) an uptrend shall start. Also, the market will feel the impact of lower production elsewhere as a result of a terminal that will then be depressed for so long – at or below US$ 1.00 per pound.

Until there though we are probably not going to see the market going anywhere from a price point unless international investors get excited about cheap Brazilian assets and buy the BRL, even though the country has a democracy that insists on revising laws that will make it impossible again for those who have money be arrested, even if they are caught on wrongdoing – all thanks to the Supreme Court.

Technical Focus

December19 contract in NY has the first resistance at 101.95, followed by 103.85 and 104.95. Support levels are at 98.60, 97.00 and US$ 95.65 cents per pound. London Jan20 contract resistance is at 1,294 and 1,348, while support is at 1,253, 1,230, and US$ 1,211 per ton.

Wishing you a pleasant week,

Rodrigo Costa

Skype: rodrigoccosta10

WhatsApp: +1 646 468 7091