KC traded to its highest level in 7 weeks buoyed by technical and short term spec related buying as the market traded through the 3/8ths retracement of the yearly move and initially struggled as patient sellers took advantage of the rally in the face of a weakening BRL but found a fresh round of buying on the close. Prices traded to levels not seen since the 13355-13375 gap was formed on Oct 10-11th, running into resistance as we approached the 100 day moving average, a level we have not closed above since the gap was formed. London in the meantime broke its streak of 7 lower highs, and 7 out of 8 lower lows (the 8th day being a double bottom), to take out the highs of the previous 4 sessions and score back to back $23 gains. The strongest rally since November 2nd in NY leaves the first of 2 elusive overhead gaps (13355-75 and 13745-13770) within striking distance which if achieved will take us out of what has been a tedious 7 week, 875 point range.
OPEN INTEREST DIMINISHES MAKING FUNDS POSITIONS LARGER
The short week in the United States, due to the Thanksgiving holiday on Thursday and a half-day for the financial market session on Friday, helped to keep stock indices hovering near their highs.
The minutes of the last FOMC meeting encouraged investors to buy risky assets as the committee message implied doubts if the current level of inflation would remain close the FED’s target if interest rates rise in December.
As a result, the dollar index (DXY) slipped to trade at levels last seen at the end of September, attracting buying interest on commodities with the CRB index strengthening, led by Lean Hogs, Nickel, Cotton and energy materials.
March 2018 coffee contract in New York tested US$ 124.85 cents/lb one day before the December17 contract entered the notice period, and has traded back and forth around US$ 127.50 cents. On Friday arabica went up above US$ 130.00 cents, to then settle unchanged in a day that many were out of the office.
Robusta coffee in London has taken another dive testing a support line drawn from the lows of Dec 1st 2016 and April 25th last, and it must hold this week above US$ 1,710 per ton to avoid attracting more selling from funds.
The Unite States Department of Agriculture has released several semi-annual coffee reports, with Indonesia and Brazil being the first two origins being reviewed. For the Asian country the production estimated for the current cycle, 2017/2018, was kept unchanged at 10.9 million bags.
For Brazil the agency lowered the forecast of 17/18 crop to 51.2 million bags, nine hundred thousand bags less than the 52.1 million estimated on June’s report. Arabica’s number fell from 40.5 to 38.8 million and conilon rose from 11.6 to 12.4 million bags.
The USDA has also increased by 100,000 bags the 17/18 crop of Colombia to 14.7 million bags and for India the federal body estimated the harvest at 5.6 million bags, compared to 5.45 million in June.
Numbers for the 2018/2019 Brazilian crop so far are only coming out from private analysts/trade houses, with a wide estimated range of 58 to 65 million bags. One has to wait at least until late January to have a better grip (we will comment on it on our Crop Report this coming Friday).
Weather has been favorable for the Brazilian coffee-belt and the quietude among farmers, who were frightened about the potential of recovery of the trees before rains started, ironically makes some international players wonder if things are just fine at the fields, given that when conditions are poor the producers speak up.
Demand for natural coffees has improved slightly in the past fortnight, with inquiring for shipments as soon as December. Coverage needs for the first half of 2018 does not seem all satiated, in line with expectations and the anxiety among merchants. The lower availability of fine cup beans in the European spot market, compared to the American one, as well as a stronger Euro helps buyers from the old continent.
It is hard to find, not to say impossible, cheap differences in general, and one has to bet in a firmer terminal to provide some weakening of the basis. If the “C” does not rally from a perception of tightness of the physical that shall last at least until April of 2018, some buying on futures could come eventually from the appreciation of the Brazilian Real and the Colombian Peso.
The non-commercial short position of the arabica contract is at very near relative record levels after the sharp drop in the number of the open interest. The CFTC showed funds holding almost 38% of the OI on the short-side, and only 536 lots away from the record net-short. For now the position seems comfortable, or at least for as long as the market trades below US$ 133.75 cents. Potentially though, a break through the level could be enough to spur volatility and it would not surprise if prices move sharply and quickly toward US$ 140.00 cents.
To do so though, we need some positive reason for New York to rise, which fundamentally can only be expected from a weaker greenback and new appetite for commodities. New York can eventually also be helped with some anticipation of the 10,000 contracts that the index funds might have to buy in the rebalancing of their portfolios in early 2018.
ICE March18 arabica has an edge formation, with 127.35 and 129.15 levels as first support and resistance, respectively. After that on the downside the 124.85 area needs to be preserved, otherwise the market could seek for a test of 122.65, followed by 121.85, 117.55 and 115.50 cts. On the upside 132.30 is the level to be breached before the 133.50 / 133.75 and the 137.45 / 137.70 gaps become the targets. In London Jan18 robusta support levels are 1,710, 1,650, 1,627 and 1,609, while resistance areas are at 1,799, 1,817, 1,889 and 1,907 dollars per ton.
Have a good week and good trades,
Arabica began the day with a holiday hangover, yet appeared to be the beneficiary of macro commodity allocations just after 9am EST, bursting higher on the best volume of the day not long after other commodities including sugar began their move upwards. The DXY and BRL appeared to lend support, and selling was limited until near 130.00. Origin was noted on the highs, although the volumes were relatively unimpressive. A lack of follow up buying led to KC giving back all its gains as intraday specs liquidated and origin hedgers who had missed the move rushed to take advantage. MOC buyers helped dress the windows, ultimately driving KC higher for a 55 point gain, settling 127.55. Robusta suffered a bout of selling around 6am EST, and while the outright volume only totaled around 300 lots, a lack of resting bids led to a $15ish plunge in thin conditions. Roasters continue to add length into weakness, and while prices recovered, they couldn't quite get back to unchanged, settling -7 on the day at 1749.
Good morning and Happy Wednesday,
I think it’s fair to say few could have expected yesterday’s price action, a violent downturn was observed across the board in Commodities, and Coffee felt the brunt of the pain – dropping 4 cents in 10 seconds. A mighty recovery followed though, and we closed the session relatively unscathed with a settlement of 130.45 (-0.30) in the March contract. The chart below (overlaid commodity basket) shows the extent of the damage that hit in such a short time frame). Gold was the only contract that went the other way whilst everything else was getting smacked.
Arabica closed the week in fine fashion, posting a closing print (KCH 130.90 +1.10) well above the previous intraweek high and settling less than 2 ticks below the upper Bollinger band. Spreads again dominated the day with 29,536 total on the day and total futures volume of 73,591. Z/H traded nearly 19k times as OI officially rolled into the March contract. Both the UBB and the abundance of option-expiration related selling capped the market in a day of mixed commodity trading. Robusta settled down $8 at 1816 for the session amidst terrible volume. The 5860 lots of total trading were exceeded in futility over the prior year on only 3 occasions – one of which was US Independence Day, another the Friday before Christmas break. That figures to change come Monday following the release of today’s COT which revealed 8322 lots of net Managed Money selling as the short cohort grew by 9. Short funds now outweigh longs by a better than 2 to 1 margin. The current net -15,057 number is the largest since March 15, 2016’s report. Meanwhile commercials added 7715 lots of net length as 2 traders appeared to flip from short too long. The net commercial long of 13,191 comes in at the longest since April 12, 2016.
What a difference a year makes in the coffee market. One year after the U.S. presidential election and the market posting a 22 month high of 17955, KCZ traded in all of a 170 point range with the day’s low 3 cents above last Wednesday’s 5 month lows. Last year funds were carrying record net and gross long exposure, while today they are carrying a record short. About the most exciting part of the action in today’s outrights was the market taking out the double top formed against yesterday’s highs of 12580 by all of 10 points on the close. Total volume was 71,068 lots, the bulk of which was accounted for in 31,890 spreads traded. Dec/March traded 19,693 times and held steady at 345 under. Robusta in the meantime traded by $1 to its lowest level traded since August 25th 2016, and has traded a lower high for 8 of the past 9 sessions, the exception being the Nov 2-3, 1877 double top basis the January contract.
The International Coffee Organization flagged a “well supplied” coffee market as it ditched an estimate of a global production deficit last season – and lowered ideas on shortfalls for the two previous years too.
The ICO, which had estimated world coffee production in 2016-17 at 1.19m bags behind consumption, revised its forecast to show a surplus of 2.38m bags for the season, which ended in September.
The revision reflected an upgrade, “on the basis of new information from member countries”, of 3.57m bags to 157.4m bags in the estimate for world production.
Meanwhile, the organisation held at 155.1m bags its estimate for world consumption.
‘Market is well supplied’
“After increasing for two consecutive years, world coffee consumption is estimated to have remained stable,” the ICO said.
“Given the rise in global coffee output against stable consumption, coffee year 2016-17 is now seen in surplus after two consecutive years of deficit.”
The world coffee market “is well supplied at the start of coffee year 2017-18 by the replenishment of stocks over this past year”, the organisation added.
Indeed, the ICO cut too its estimate for the world output deficit in 2015-16, by 688,000 bags to 3.22m bags, and for 2014-15 by 315,000 bags to 2.71m bags.
These revisions reflected in the main higher estimates for robusta coffee output, particularly in Asia.
Combined, the revisions to these two seasons and the figure for 2016-17 added more than 4.5m bags to the organisation’s estimate for world coffee supplies.
‘Prices drifted downwards’
The ICO flagged that coffee prices “have drifted downwards since the end of August”, averaging 120.01 cents a pound last month, according to an ICO composite index - a 17-month low.
For “other milds”, the index dropped to 4.0% month on month 140.71 cents a pound, the lowest since January 2014, undermined by the soaring exports from Honduras.
An ICO robusta coffee index fared relatively well, in easing by 0.8% to 98.39 cents a pound.
However, robusta futures proved less resilient on Tuesday, closing down 1.7% at $1,824 per tonne in London for January delivery, a 14-month closing low for a nearest-but-one contract, in a decline seen as fuelled by ideas of supplies coming online from the newly-started Vietnamese harvest.
New York arabica coffee futures for December eased by 0.7% to 124.70 cents a pound.
Arabica shook off early grogginess on its way to a 125.55 closing, +160 points. Correlations were strong on the day (see chart below), with commodities as a whole trading sideways early and finding a convincing bid around 10am – followed by a dollar move that was similar in pattern yet lagged the complex. Some credit was given to a bullish market report from an oft-quoted analyst suggesting a substantial decrease in Brazilian 18/19 crop potential, yet the timing of the news article matches equally well to the rally in cocoa, and not long before the moves in crude, sugar and others. While the COT fell in line with market consensus Friday, providing a non-event for a recalibration trade, most discretionary traders struggle to justify prices at current levels with limited Brazilian participation in the nearby contracts. The Z/H roll is a touch behind schedule and 4700 lots of trading pushed structure in a tick, settling at -3.50. The hedged Put Spread / Call Spread tandem (legged iron condor) showed up again in the May contract, trading 1500x each on screen. London slipped a dollar in rangebound trading, settling 1855 basis F, while spreads remained firm.
On the wake of the new month, London market did not find any reasons to look north and spec pressure continued to punish the flat price. The first thirty minutes of trading set the stage for the fall of robusta, it tumbled below yesterday’s lows and the inability to find buying interest only added to the dire picture. The active trading period brought another round of selling which the market was unable to absorb. Robusta moved on a down spiral path ending half an hour before the close at a new low in more than a year, 1830 vs January. The Nov/Jan spread spiked on the day moving to $59 premium while Jan/Mch was contained within previous two days’ range 14-26 premium. Option trading was active with F18 1900/2050 CS vs 1846Δ24 trading 2350 times @ 29. On first notice day for the November robusta coffee contract 3,351 lots were tendered to the market with ABN Amro being the main contributor and benefactor.
On arabica, it is the last straw that breaks the camel’s back, and so it did. Unable to gather interest to push higher in the last 2 sessions, New York followed the faith of its cousin tumbling lower on the day. The second position reached the 126.60 low area dating back to August and after bouncing from it 5 times during October we finally broke on system’s trading technical signals. Interest from natural buyers is not present at least not in any form to absorb the running of the bulls we suffered today as previous buyers turned into sellers. The spread position certainly added to today’s big volume with Dec/Mch adding about 10,000 and Mch/May about 7,000 lots. Only the later weakening on the process. Options were not behind on activity as the Z17 120P traded 2,376 lots and the Z17 127.5 C traded 2,187 lots. Certainly the 125.00 area has been pivotal place in the past. Holding the area should give us room to move forward otherwise, the 76.4% Fibonacci retracement from the low of June is 2 cents away.
LRCF8 settled $40 lower with volume estimated at 26,208 lots, including 7,433 spreads, 817 EFP's and 0 EFS's. 6,221 calls and 2,100 puts also traded. Open interest 102,844+2,562.
KCEZ7 settled -2.15 cents lower with volume estimated at 81,168 lots, including 32,068 spreads, 1,258 EFP's, 106 EFS's and 1,262 TAS. 7,247 calls, 6,075 puts also traded. €=$1.1634. BRL: 3.2727/$. CRB: 1.8755. Crude oil 54.64. S&P500 2576. Open interest 239,067-48.
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