Evening Coffee by Societe Generale

Weekly Coffee Perspective – Aug 29th to Sep 2nd of 2016 – Week 35
 
 
TALKS OF EARLY FLOWERING AND WORRY ABOUT CONILONS
                           
The implied chance for a FED interest rate hike in September is now at 42%, up from 22% ten days ago and from 0% the day after the Brexit vote. Last Friday speeches from Janet Yellen and Stanley Fisher paved the way for the normalization of rates on the next FOMC meeting, which will happen on September 21st. While employment and inflation are near the goals of the committee, most analysts doubt on a move to take place before the US elections, but it seems like few are in doubt that until December the rates will go higher. The DXY had a strong trend reversal on the last day of the Jackson Hole event, but today it did not have a follow-through. Risk-assets pared gains with commodity indices suffering the most, as the S&P500, Dow and Nasdaq are up as I write. Coffee in NY remains more volatile comparing to London trading towards the vertex of a tringle formation. The influence of the greenback remains quite significant – as it has been the case for a very long time. Short-term action will depend on the capacity of the market to break above US$ 150.00 cents/lb or below US$ 135.00 cents/lb.

Fundamental Focus
A strong “C” rally a week ago on apparent fear of a cold night in Brazil waned after no damages were reported. The following day comments from local analysts in Brazil mentioning about a premature flowering that shall take place this week in some producing areas, after recent showers, trimmed the gains and triggered specs to liquidate some long bets placed early in the week. An outside reversal-day was just a bear trap with the performance of the last two sessions being choppy. The CFTC report did not surprise showing non-commercials increasing their long side by 3,711 lots and adding 308 lots to the short column. Commercials reduced longs and shorts, most likely a reflection of spread liquidation. Producers and natural-buyers seem to be closer to selling and buying ideas on the flat price, not the case yet on the FOB markets. Looking (again) at the commercial-gross-long on the COT one would think that coffee-users are not worried about seeing the market being resilient to trade back down to levels seen on the first half of the year – the position is the smallest one in two years. On the bearish side the bets have to be on Brazilian farmers to be more aggressive sellers if the flowering turns to be good, or mild-producers to participate more actively on the sell side of the market once they have coffee available – historically though the later argument tends not to materialize. One other wild-card would be for Dilma not to be impeached, which would take the BRL back to 4.00 – again a very unlikely turn out. I guess next week, when most trading desks will be fully staffed after the summer holidays, everyone will sharp their pencils to adjust their books and get ready with revised future prognostics that will serve as a base for next year budgets. The current perception is that no matter what the 17/18 Brazilian arabica crop will be smaller after a bumper 16/17, the doubt is on the conilons, which has an explosive potential if the North of Espirito Santo suffers with lack of rains. Internally in Brazil the peak of pain from those short-differentials might be already behind us and if farmers keep dosing their number of bags released the basis could get firmer, even more if the BRL goes to 3.00 as some economists are suggesting. The availability of the spot markets at the consuming countries will be the buffer in between, and for that matter the bears argue that there is not only a significant availability of green beans but also of final products. Currencies seem to be where we could see something coming from to take these markets out of past two months’ range.

Technical Focus
A move above US$ 150.00 cents on the “C” December16 contract shall attract more buying while a break below US$ 135.00 cents will force some long liquidation (the triangle I mentioned on the first long paragraph). If tomorrow the market manages to close above 146.90, sustaining the following day, it might enough to call some speculators to the buy-side, but apparently origins will participate, therefore a good buying appetite will be needed. On the downside a settlement below 144.85 shall trigger some light sell-stops with bigger ones likely to be under 140.00 cents. November16 in London has the first resistance at 1828, followed by 1855 and 1876, while support levels are at 1793, 1768 and 1760.