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Coffee prices came under pressure with KCZ settling down 185 points at 112.40, as commodity markets took it on the chin, courtesy of the dollar index trading to the brink of 14 month highs. All commodities in the BCOM index save lean hogs and silver were down on the day as sensitivity to interest rates hikes supports the dollar whilst bearing down on the commodity complex. Arabica, true to form, traded more specifically correlated to the BRL as the FX market remains jittery on uncertainty surrounding President-elect Bolsonaro’s intended economic reforms. Open interest increased by 2,511 lots on yesterday’s 540 point sell off in what was likely a mix of new shorts and long liquidation with the bias to the former. Robusta faded $11 settling at 1676 and formed a double bottom at 1669, the high of the 1665-1669 October 5-8th gap.
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A dreadfully boring day went out under duress, the victim of predatory selling and Brazil hedging ahead of the nation’s election this weekend. Arabica closed 119.75, -1.40, taking out yesterday’s low by a single tick (119.25) during the settlement period, allowing for an outside day before snapping back higher, trading around 120 into the end of the day. This caps off a questionable performance on the week, as KC traded its first lower high, lower low on the weekly chart after 4 consecutive weeks of pure ascent. While the market favored candidate Jair Bolsonaro seems all but assured to take the helm of the Brazilian government, a growing chorus of traders wonder if his victory has been priced in, leaving room for weakness in both the BRL and coffee come next week. Robusta closed up $23 at 1720, even after it too was the recipient of end of day selling. Nov notices clocked in at 3047 lots. Managed Money pared bets on all sides of the London market with longs liquidating 987 lots, shorts covering 5388, and spreads falling 1859. Commercial positions also fell dramatically as heavy switch positions drew down into notices.
COT net non-commercial position came in well below expectations (-51,983). Enjoy the weekend! Arabica, 121.10, +3.45, shook off global risk concerns to claw back all but a penny of yesterday’s selloff. Prices were supported early by value buying, yet volumes were muted even as the clock crossed the 8am NY hour. Modest Brazil selling kept ambitions in check, but the thin trading conditions ultimately gave way to a chunky allocation at 11:20. Our expectation is that this was an infusion of CTA buying triggered in the last couple days. Sensing an opportunity, motivated trade specs threw fuel on the fire pushing the intraday high to its peak minutes later. Interestingly KC ignored BRL weakness for much of the day even as KC prices remain above the multiyear median line in local terms. Spot spreads finally tightened in as far at -3.65 as the short roll presumably began, yet end of day weakness in ZH (-3.75 settlement) once again confounded the trade. London was unable to keep pace on the day, settling down $2 at 1719 on the day as X/F continues weak at -26.
The Arabica market (122.05 -50), posted a new high for the move adding to a string of 8 higher highs and lows over the past 9 days. Prices opened up unchanged and rallied to the high of 124.30 at 6:53 a.m. and by 7:40 the low of 120.80 was posted, before most U.S. traders had even manned their ships. Moving averages have been crossing positively almost on a daily basis. On October 9th the 26/40 day crossed, on the 10th the 10/100 day moving averages crossed, the 11th the 20/60 crossed, the 12th the 26 crossed the 50, and today, the 40 day crossed over the 50 day moving average. As the Brazilian real has rallied 13% off of 3 year lows, sugar has rallied 29% off of 11 year lows, and KC to date has seen a 30% advance since its 12 year low of was posted. The biggest intraday pullback since the 95.10 low of September 18th was yesterday’s 255 point dip as the technical breakout continues to engage system and momentum funds as buyers. Robusta scored a new high for the move plus $16 on the day only to retreat and settle at 1775 plus $1 MT.
Arabica, which opened on the low’s yesterday, started today out on a new highs for the move and following 3 days of gains, settled lower at 117.65 down 170 points. The Dec contract filled the 116.80-116.90 gap from yesterday’s opening while the low in March was 10 points above yesterday’s. For those who mind gaps the one from yesterday between 120.40-120.50 along with the 112.80-113.70 (Oct 5-8) and 98.20-98.60 rollover gaps remain open. Intraday price action more or less mimicked that of the BRL which posted a 2 ½ month high ($/R 3.6931) before weakening a tad in subdued transactions and tightest range in 4 weeks. Open interest fell for the 12th day running which has raised caution amongst traders in light of the short covering nature of the buying, and paring down of the extreme record non-commercial short. Robusta traded a similar outside session with a higher high and low settling at 1755 plus $3 MT.
The twin impacts of 200DMA resistance and generalized risk off as tariff impacts come into view with corporate earnings conspired against coffee, 111.90, sending it 125 points lower after an admirable European session. An opening gap was closed by mid-morning US time as the BRL opened weaker – itself a victim of global sentiment. Robusta again garnered Vietnam selling even as CTAs buy alongside roasters, pressuring prices in the early hours, though the final print was a modest $6 lower at 1698 basis F9. The futures and structure seem to be mutually exclusive as to which will perform well, and even as outright prices climbed steadily higher for the final 2 hours of the London session, XF closed a tick off its low, settling -16 in a -4/-17 range. Arabica posted a wild ride, settling 105 points lower at 106.60 just above the Dec based UBB. Prices predictably rallied on system short covering early, shaking off good clips of Brazil hedging. With buy signals flashing, & the BRL accelerating gains on its way from 3.87 to 3.82 over the opening hour, KC was able to rally to 110.80 through a wall of origin selling. However, as the BRL weakened from 10:30am EDT onwards towards 3.90, and correlated markets like sugar, cocoa, and especially robusta slipped into negative territory, spec buying proved unable to keep pace with the flood of origin & trade house profit taking. To cap off a disappointing performance, MOC selling inundated the KC at the end of the day all but assuring the negative close. Robusta, 1588, -16, also fell on the day as spec selling pressured prices lower and roasters were unwilling to accommodate the full brunt of the flow. Most surprising to many was the weakness in XF specifically, as the front month spread fell to a $2 premium. The market dynamics are fluid as the crop approaches, and nearby price action will require continued monitoring.
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October 2020
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