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,