Coffee Commentary for Jan 16

   ICE Coffee Futures Recover

Technical buying helped to prop up Arabica coffee today as futures bounced back from technical support to levels that sparked intra-day short covering. The active contract for March delivery settled 115 points higher at 118.35 cents a pound after failing to test the 120.00 level, making today’s performance a non-issue for the expected range of technical resistance at 120 and support at 116.50. Volume fell from 22,000 lots yesterday to almost 16,000 today while the open interest registered a minimal drop in exposure.  In Brazil, the real opened weaker after the central bank increased its Selig rate to 10.5% to control inflation and weakened further to BRL 2.3632. Market analysts stated that despite recent reports of reduced expectations for Brazil’s 2013/14 crop, cyclical trimming and better long-term management of plants’ productive tissue will keep coffee stocks flush. Coffee futures remain spellbound by technical trading while commercial participation is limited and a definitive break of the 120 basis March will be necessary to activate a new upward phase.

London was quick to move into positive numbers without the presence of origin close to the price action. After the market recorded a reactionary move lower yesterday the overall pattern remained intact with the combination of fresh technical buying and overnight short covering aggressively pushing the board higher back towards this week’s highs and within striking distance of the 1750 option strike which remains the markets focus. The swing higher attracted intraday positions with volume notably thin in the move. Vietnam differentials have weakened this week and local business being reported at a good pace but the translation into the London activity is difficult to link. The main attention in London during the morning was 2,600 lots of volatility trades involving the March and May 1800 Calls which came together as levels spiked to the highs of the morning of 1745. The March premium continued to edge higher trading out to $40 in decent volume into the afternoon. Prices rallied well into the options above 1750 as the market gathered pace and pulled in more technical longs. Traders concerns of the tight deliverable stock scenario start to move down the board with the May/July moving beyond $40 premium in improving volume. Players are worried that coffee is moving directly into manufacturers with little available for the build of deliverable stocks. Impressive performance for Robusta as the backwardation strengthened down the board and the market worked into the first big Call exposure at 1750 which carries 3,500 Calls and 1,810 puts.