First notice day saw 954 notices issued and KC settle at 116.25 down 40 points, the lowest close since the 17th of April. Open interest fell by 4,922 lots and with July down to 1,715 lots entering the day notices were taken with a grain of salt. Intraday rhythm closely tracked that of the BRL which weakened slightly on the day as the BCB sold its biggest lot of floating rate bonds since February of 2016, in addition to its daily regimen of selling FX swaps in an effort to support the currency.
Outright flows were largely spec to spec at the lower end of the 27 month range. While first notice day being out of the way did not provide a relief rally it also removed any sense of urgency.
Coffee fell 85 points to settle 116.70, broadly influenced by the BRL and a weak overall commodity complex. Attention was very clearly elsewhere for many traders with the World Cup a prime culprit. Productivity concerns aside, traders seem to have reached an agreement that the path of least resistance and highest probability is lower. Robusta engagement was low up until the close, suffering a $3 loss to close 1687. MOC selling pounded the market into the red as spreads weakened a touch for the upcoming two periods (N/U +14, -2 and U/X -6, -1). Colombia elected a new pro-market President, Ivan Duque. President Duque is seen as an extension former President Alvaro Uribe & termed a “creature of Washington.” The currency weakened slightly on the day, helping producers balance the futures market loss.
Following yesterday’s Fed announcement when expectations for rate hikes were raised from 3 to 4 in 2018, the dollar index rallied to its highest level since the 30th of May, the day after 2 ½ year highs were posted. Dollar strength weighed on commodity prices as all but 5 of the 22 commodities in the Bloomberg Commodity Index traded down on the day. The BRL actually traded a tad firmer, as the BCB continued its regimen of providing liquidity by holding a second extra auction of 40,000 FX swaps. KC activity was subdued in the outrights as prices traded to their lowest since the 18th of May. Since the gap was filled a week ago the market traded in a 245 point range. July/Sep traded between 230 and 210 under 26,805 times, 3,479 July/Dec’s traded between -585 and -565, and 6,557 U/Z traded between 355 and 350 under as positions were rolled down the board.
New York started the week with its first higher high and higher low in six sessions settling at 119.20 down 30 points as September open interest surpassed July’s following Friday’s July option expiry. A negative, at face value, COT report initially weighed on KC with losses confined to 105 points, however once the FX markets became active downside was buffered as prices closely tracked the rhythm of a steady Brazilian currency. Funds covered net 7,859 lots over the reporting week and the gross commercial short grew by 7,164 lots validating that origin were active hedgers as prices rallied from 121.65-127.15. Worth noting is the gross index short, whose historical average since inception in January of 2006 is 4,283 lots, now stands at a record 21,809 lots, surpassing the previous weeks record by 4,360 lots. The gross index long grew by 4,708 contracts, ergo the net position only shifted 348 lots longer. Spreads accounted for the lion’s share of the day’s volume as 40,612 traded. On day 3 of the traditional index roll July/Sep changed hands 29,336 times at steady to firmer levels between 225 and 205 under.
A 4th day of losses tallying 545 points as KC relinquished 120 points to settle 5 points off the low at 118.25 basis July. Open interest jumped by a 3,400 lots on Tuesday’s 2 cent sell off after dropping 8,539 lots during the previous 2 days losses as it appears long liquidation has yet again led into systems piling on new shorts. What took 2 weeks for the market to rally from 117.10-124.95 in an all too familiar pattern, has taken 3 days to essentially give it all back. Industry took on cover in rote fashion, while origin remained quiet in spite of a BRL trading to a new low ( $/R 3.84) on a day when most major currencies were firmer. The 117.10-120.20 gap higher on the second month continuation chart remains open for a 12th session. Over the past 3 years there have been 8 gaps higher, the longest of which, in June of 2015, took 12 days to fill while the others were filled within 5 sessions. Might as well get it over with?
KC (122.55, -1.15) started the day with quiet trading around unchanged, slipped ever so slightly as the Americas day began, and then returned to their upward trajectory on the back of what appeared to be spec short covering – with a bit of a roaster assist. However, Brazil selling began to arrive, in admittedly shy manner to start, and by the time it was announced that Petrobras CEO had resigned the low was in. More sizeable origin offers were scaled in towards the day’s high, yet as is often the case the opportunity had passed for the moment. Sentiment seemed to swing with the price and traders who were reevaluating their upside targets in the morning sounded something approaching bearish by the end of the day. Nonetheless, the month begins with a higher high, higher low, and with the market settled comfortably above the 100MA. Interesting if flat price irrelevant were the 108 AA’s passed in the March 2021 contract. Robusta closed 1750, -2 in the first day of trading with N as the spot month. May deliveries totaled their largest amount (6871 lots) in 7 years.
KCN8 settled +.05 at 120.30, in a session which experienced its highest low and high since the 7th of May, within a -50 to +190 range. Resistance emerged as prices approached the 122.62, 100 day moving average, an obstacle which has only been surmounted twice this year. Volume of 69,485 lots was enhanced by 25,804 spreads of which 19,457 were in the July series. London performed poorly on a technical basis with an outside reversal and the low for the day posted on the close, which in tandem, saw NY retest the early morning lows. In options the trade of most note was 2,648 March 210 calls trading live between 135-150 points. Month end tomorrow carries little by way of expectations as volatility remains depressed and price levels fail to generate enthusiastic participation.
Arabica fell 150 points to settle 119.35 in unremarkable trading. Prices slipped throughout the European hours in “risk off” trading, and the entire range was in place by 8:30EDT when a quick 1000ish lot selloff sent prices to the day’s low – yet found no follow through. The DXY seemed to be a weight on the day, but more than anything boredom seems to be overcoming traders as prices retreat to the well-worn range. Options were fairly quiet after yesterday’s monster session, although there was some notable if esoteric paper around; nearly 600 N 137.50 C / Z 95.00 fences traded at a 6 point premium to the put, and a couple of apparent rolls came in with similar quantities. London traded a nearly perfect layover with KC before diverging lower with chunky MOC selling painting the close. RCN settled 1751, -39 as N/U slipped to 10 over under late day pressure.
While KCN closed a modest 65 points higher at 120.85, the day’s flow felt stronger than price alone would suggest as systematic buying pulsed through the market throughout. Good chunks of Brazil selling were noted down the board on our desk, and trade house prop selling accompanied them – presumably sparked in part by that very origin action which has repeatedly been a sign that the market is topping. The real excitement was in the options arena where vol was bid all day, particularly in the back where the Z 140 and 150 C saw size buying at firm prices. To reduce the market to any given strike would be foolish; a total 18,435 calls traded on the day vs 6301 puts – fairly monstrous volume. The BRL was a clear driver for the majority of the day, and the sugar/coffee proxy trade was obvious as well. Robusta fell $5 to 1790, again topping out at 1799 and failing to crack the psychological barrier of 1800. Origin took a breather in London from our vantage, though one imagines they will be reengaged if another crack through the top of the long term trend can be achieved.
Arabica took its cues from the FX market, slipping under the weight of the DXY and BRL as the latter traded to the verge of 3.70. KC closed 117.05, -55, and while spec selling dominated the day, roasters were all too happy to accept price as they added impressive length throughout the morning. Origin was reported to be around, though we did not see it in any meaningful quantity, and much of the trade was dubious as to their impact. Interesting late day buying sent KC spiking higher in a short lived rally as iceberged offers were eclipsed, gaining around 75 points on modest volume before being sold back down. Robusta featured more volatility in thinner trading – seemingly attracting less algorithmic depth – yet largely remained in tune with her sister market. Origin was quiet from our perspective on London as well, a bit of an outlier considering how prevalent their selling has been on our books for quite some time.
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