Even by the standards we have become accustomed to, coffee (96.70, +.85) posted a session dominated by the BRL. The market languished just shy below 96c for the bulk of the morning as outright volume turned over ever so slowly. Interestingly crude oil was well matched with KC as well (see chart of the day), which suggests that the BRL may have been driven by the key commodity price to a greater extent than the improved poll position of Haddad. The timing of this correlation, assuming it is something more than coincidence, is notable given the authorship of a Bloomberg opinion piece arguing that the BRL was more likely to be driven by commodity values than politics. It bears watching whether this is more than a one off. If crude can turn the BRL, and the BRL in sequence coffee, the long suffering bulls may have a newly minted hope to hang on to. Robusta closed down $5 at 1487 in the active Nov contract, yet Sept rose $18 in notice period. The final trade / delivery date stands at this coming Monday, with OI still above 2800 lots.
Coffee settled up 165 points at 102.10, running into resistance around the mid Bollinger band. The DXY was the macro trade du jour, with the currency under pressure as optimism grew around potential US – China trade talks. Options were slow, yet structure remains active with another 6300 ZH trading inside yesterday’s range. Price seems comfortable at these prices with narrowing moving averages, even if traders – particularly those in origin – are decidedly not. London was a pure sympathy trade amidst dreadful human involvement. Even modest orders would send bids / offers into a disappearing act. The active Nov contract gained $38 to 1516, keeping the arb steady at 33.33.
Coffee posted a second higher high, higher low, all the while closing 160 points lower at 102.20. All pertinent moving averages remain above current prices. The day was mostly quiet, with the European hours being marked by a choppy slide lower, an 8:30 selloff, and a 9:30 to 10:30 inverse V and a dreadfully small range for the balance of the day. One could argue that the Brl was a dominant feature – when can’t one? – yet the 8:30 drubbing was a unique event, and the end of day weakness was in opposition to the currency influence. Beyond that, there was very little to report, with commercial participants woefully non-participatory from our perspective. Robusta closed down $9 at 1492 as 58 lots were tendered for a month to date total of 231.
Arabica, 101.45, -35, began the day under modest pressure following yesterday’s BRL selloff as ex-President Lula attempts to move his unsuccessful appeal to run from his prison cell from the domestic courts to the UN. EM contagion fears were also primary in the financial media, if greeted with a degree of dubiousness by coffee traders. Pressure would mount on coffee nonetheless, ultimately taking prices to fresh 12 year lows at 98.65 in the active / KC2 contract. 1st of month system selling along with renewed BRL weakness sent prices lower on three discrete clips of sizeable selling, the largest being two 800+ lot clips around 9:30am EDT. Roaster buying was noted – as expected – into the weakness, as was some discretionary trade house prop activity. The BRL would ultimately reverse course under uncertain circumstances, and KC followed as is custom. Robusta closed at 1475, -14, with better engagement than late. London has now posted 5 days of lower lows and lower highs, offering fresh opportunity to roasters swimming in such.
Arabica closed the month down 85 points, settling 101.80 while posting a higher high, higher low. International intrigue was again on the table, and with month end there were many moving parts. An early unexpected announcement that a decision could be made today with respect to Lula’s ability to campaign in the upcoming election was considered supportive, as was a poll that showed Bolsonaro pulling even with Lula in Sao Paulo. Nonetheless, speculative selling into the end of the month, particularly on the close, seemed typical of a manufactured settle. Interestingly KC traveled closely along the path of the DXY, ignoring the improving BRL from roughly 10:30 to 12:30, suggesting (only partially tongue in cheek) that coffee simply finds the most bearish macro correlation to follow on any given day. News of Coca Cola’s acquisition of UK coffee chain Costa dominated the mind space of many commercial traders, with the larger ramifications for the industry at the forefront. One fund trader noted the irony in Coke’s expansion into what they called a hot and growing segment while green prices remain under assault . Robusta finally posted small scale notices, with 54 lots being tendered today. However OI remains a chunky 5601 suggesting that the deliveries were on the margins. RC futures fell another $21 to 1501, briefly taking out the 1500 line with a low 1497, the first time the market has done so since April 2016.
Arabica traded a fascinating session, ultimately settling down 25 points at 102.65. While price was mundane, the reasons for it were not, as coffee traded one of the more systematic days in memory, driven clearly by the BRL in what was a wild day in coffee’s largest producing country. While conviction option trades were lacking – a somewhat late in the day trifecta of strategies coming after noon NY time finally posted trades of greater than 250 lots – futures volume was quite significant. In addition to the outright size, the trading was well spaced, with 2 notable upticks, one as the BRL halted and resumed trading as the BCB stepped in with $1.5B in FX swaps to stem the slide into oblivion the BRL was undergoing (4.2133 low), and again on the close as aggressive book marking was undergone in an effort to push Arabica back into green territory. Anecdotally both sides of the commercial equation were quiet, particularly with European vacations in full swing, American roasters extending the Labor Day holiday, and Brazil retaining coffee as a BRL hedge. As pictured below, the proxy trade was present in the extreme, with coffee effectively being a vehicle to place bets against (and later for) Brazil. While Argentina is not a topic that is mentioned often here, the ARS was likely a root cause of KC’s pain for much of the session, as the BRL tracked its neighbor closely. Ultimately Argentina’s central bank also intervened, hiking rates 1500bps to 60% to stem a run on the currency. These are incredible times in emerging markets. Robusta closed the day $24 lower at $1522, missing out on the late day benefit of the BRL reversal and sympathy rally. OI remains thick in Sept, with 5769 lots outstanding, and the U/X spread well bid into the 80/90 range as shorts are squeezed out of their position for the second consecutive notice period. Substantial delays in shipments out of Brazil remain a hot topic on our desk.
A third session of gains for New York which settled at 105.75 +105, while London was closed for their Summer Bank Holiday, reopening tomorrow to FND. For the first time since the 7th of August, and only 3rd time since May, KC managed to post a 3rd day of higher lows and high’s for cumulative gains tallying 485 points. Momentum off of Friday’s close was carried forward aided by PBOC support, positive NAFTA developments, a firmer Brazilian currency, and argumentatively, Friday’s COT report which showed funds carrying yet another record short of 106,105 lots, for a rather imposing record 28.58% of total open interest. Short term systems were the best buyers on the day while specs who bought the break to the $1 level were noted cautiously taking some profits.
What a wild week. KCZ closed 104.70, +320 – precisely the same level as last Friday. And yet, rather than a non-existent week, Arabica posted a traumatic one, as the $1 level fell for the first time since 2006. Origin is presumed to have done much of the damage into the lows, with stops being noted throughout Mon/Tues/Wed. With the necessary risk management done, prices rose back above the century mark, interestingly ignoring the BRL while doing so. The currency remains under assault by global sellers, trading to 4.13 intraday, and political risk should remain on the table through the October elections. A chorus of traders have asked wherefore art thou Central Bank, yet to date intervention has not materialized. Robusta continues to underwhelm in terms of participation, and much as it refused to keep pace to the downside, the upside to was below par, closing 1541 +10 as the arb widened to 34.80.
COT net non-commercial position came in at (-106,105).
KC prices fell to the lowest level (100.60) and settlement (100.95 -375) since the 99.10 low and 100.90 settle of the 27th of July 2006 as the BRL fell 1.4% and momentum funds continue their assault on Arabica prices. Since July 24th the Real has fallen over 7% while KC prices have dropped 13% in the same time frame. Funds now are holding a net short position in excess of 100,000 lots which on Friday’s COT represents 26.68% of open interest, a 2% increase over the prior week’s record, yet despite the new extreme, was below what most were expecting. Industry extended out the board as a matter of course while the best sellers remain the persistent systems funds. A fair amount of sticker shock accompanied the September contract trading below a dollar for the first time since September 14, 2006 as some longs opted to throw in the towel in lieu of rolling at a 370 discount. Whether today was a capitulation day is left to been seen, and with Thursday’s FND on the horizon, even the most skeptical amongst us are begging for a gasp of fresh air. Across the pond UX remains the attention getter, trading to a new high of 87 over, while November settled +6 at 1566.
Arabica, 104.70, -65, closed lower for the 8th consecutive session, posting a 3rd lower low, lower high, and settling below 105 for the 3rd time in a decade. While specs were likely the key aggressor on the day, encouraged by the combination of momentum and renewed BRL weakness as the centrist candidate struggles under the weight of familiar corruption concerns in advance of tonight’s Presidential debate, origin played a role in the damage as well with both Brazil and washed origins apparently stopping out physical longs. The low of 103.85 was unsurprisingly accompanied by an uptick in outright volume – the heftiest of the day – as prices cracked the old 104.15 double bottom. London closed $36 lower to $1560 as the structure remains the prime event. U/X closed at its all-time high, +83, with shortness in Vitoria container availability and a multi-month backlog of Coni shipments suggesting rescue might be further down the road.