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.
Another rough day for the longs in coffee as the Arabica market relinquished 250 points to settle at 106.00 the lowest settlement since November 6th of 2013, while London on September option expiry, lost $26 to settle at 1643, a 27 month low. Red across the board as the dollar index traded to a 14 month high on safe haven flows amidst ongoing concerns over tariffs and Turkish tensions spilling over to emerging markets. The BCOM fell 1.8% (at print) as all commodities save lean hogs and live cattle suffered losses. Equities had their worst session in 2 months with the S and P falling for the 5th time in 6 sessions The dollar index turned negative In tandem with London’s close yet the BRL failed to gather any upside traction and KC prices remained under pressure into the close. KCU/KCZ weakened
to it lowest level to date of 360 under as DFU/DFX paradoxically strengthened to its highest level to date of 53 over. In search of a silver lining, save the record fund short, all suggestions are welcome.
Coffee (108.50, -80) again constrained its excitement to the spread where volume came in at 50,228 lots, led by 31,754 UZ. Once again outright volume was muted, implied around 5400 lots, on 175 points of intraday volatility. Rather amazingly U/Z alone saw a wide -300/-345 range as sellers pummeled the bids in size. In a familiar refrain the DXY dictated much of the day’s price, 8am weakness notwithstanding. With the COT coming to a close the parlour game continues; prices fell 400 points on the reporting week to the tick, with OI up 3633 (non-inclusive of today’s mundane trading). Anecdotally many are expecting the first 100k net CIT short, though to what extent that will stimulate interest is debatable. Brazil was quiet on the day – a departure from recent sessions, while roasters again added out as far as mid 2019 from our vantage. London slipped $4 to 1630. Structure remains the star as UX traded through 50 before settling 49 over on 6723 lots of volume. Like her sister market, the vast majority of volume remains in the spread arena.
A rough start to the week for KC which traded a contract low of 104.35 before recovering 250 points intraday, yet ultimately closed down 75 points at a contract settlement low of 106.25. A weaker BRL as a result of increasing concern over the Turkish currency crises set the tone for a “risk off” day in emerging markets and overshadowed any encouragement found in Friday’s COT report. Many a trader ended last week expecting the market to find support, if not a rally, as the 8,474 lot net increase in the non-commercial position far exceeded expectations. Volume was hefty at 129,042 lots with 59,565 spreads of which 32,418 were in Sep/Dec trading between 320 and 295 under. Robusta outrights traded within the recent range with Sep settling -7 at 1667, while the action was all in U/X which traded between 37-48 over as the playout of July’s delivery remains fresh in mind.
KC (107.65, -20) posted an inside day with 2 spurts of excitement in otherwise drowsy trading. It’s getting redundant, but KC spent much of the session tracking the currencies, seemingly devoid of other motivation. The volumes on the day back up the assertion; 39,753 spreads traded on the day implying around 79,500 lots associated while total volume came in at 86,579, allowing for somewhere on the order of 7k lots of outright trading. For a point of comparison, 12k options traded, the preferred venue for expressing a market view at the moment for many. Robusta closed the day up 16 at 1671, avoiding some of the deeper recesses that Arabica explored, while following the same general pattern. The arb closed at 31.85, the tightest levels in a year.
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