Who will buy the market after funds are done?

The US future’s bond market has priced a twenty-five-basis point cut of interest rates already at the July Fed meeting and some analysts see a chance of further cuts until the end of the year.

After the nonfarm payroll figures for May came out a lot lower than expected (and April number was revised down) investors jumped back in on equities helping the S&P500 and the Dow Jones to gain more than 5% in a week.

The dollar index fell sharply on the anticipated easing of monetary policy erasing the gains it had accumulated in the last two months and halting (momentarily) the fall of the CRB, which most of the components fell – except for cocoa, live cattle sugar and the recovery of oil (shy compared to what it has lost).

Coffee in New York had days of heavy swings with the July contract trading at US$ 106.15 cents per pound (highest since February) on Tuesday, then sinking more than 700 points the next day.

London has been following the movements, although to a lesser extent.

Fundamental Focus

Producers did not think twice on the strength of the boards taking advantage of higher prices to sell their coffees or fix what they have been rolling forward.

In Brazil internal flow increased significantly not only for coffees being carried over from the 18/19 crop, but also for new-crop (19/20) and forward ones – a very disciplined strategy of many.

The nature of the rally of the last two weeks has been proved to be basically a partial liquidation of the fund’s short position, as we have seen in the sharp fall of the open interest and also reported by the CFTC report.

At Friday’s COT we could also notice that commercial gross-long diminished a lot, mostly related to closing out spread positions but likely implying trade-long liquidation. One would imagine that industry has not bought much, assuming that many have been comfortably covered and unlikely willing to chase prices higher. Origins and some proprietary desks were the sellers as hedge needs are aligned to the improved flow of coffees seen around (commercial gross-short).  

Technically the market is trying to keep itself above important moving averages to confirm a trend change, but the close today and the fundamental picture that has not changed is perceived to be fragile to hope for much more.

Funds need to find someone to pass the baton and to continue buying the market otherwise it puts the market in danger, especially for those who have established new longs recently.

In fact, it would not be that surprising if the “C” now moves towards new lows after managed-money lighted up their position, which gives them room to establish new shorts with a technical failure on the upside.

Bulls argue that the stronger Real shall prevent further losses, but we should not forget that arabica has traded near to US$ 90.00 cents per pound when the BRL traded at levels similar to the current one.

The USDA released other production estimates this week, this time for Ethiopia, Uganda, Mexico, Nicaragua, Tanzania and Kenya.

Individually there are significant variations, in percentage terms, such as the 15% drop between 18/19 and 19/20 in Nicaragua (371 thousand bags less) or the increase of 15.37% in Kenya (plus 100 thousand bags).

At the same time the estimate of 271 thousand less bags produced between the two cycles, summing up all the six countries, corroborate to the argument that in general the marketplace tends to focus its attention basically at Brazil – where the 19/20 harvest will be 5.5 million lower than 18/19 (also according to the United States Department of Agriculture).

The expiration of July options this Thursday, June 13th, should have little influence on a drop in the terminal, but it may scare if prices return to near US$ 110 cents per pound.

Technical Focus

September contract in NY needs to hold above US$ 99.00 cents per pound not to test 96.50, 95.00, 92.65 and 90.05. On the upside 102.20 is the first resistance, followed by 105.75, then 108.60 and 110.00. London has support at 1425, 1410 and 1356, while resistance levels are 1468, 1493 and 1511.

Wishing you a nice week,

Rodrigo Costa

Skype: rodrigoccosta10

WhatsApp: +1 646 468 7091