Evening Coffee by Societe Generale

 
Weekly Coffee Perspective – Aug 22nd to 26th of 2016 – Week 34
 
 
RANGE-BOUND MARKET INFLUENCE BY THE DOLLAR
                           
FED officials are giving different views about their timing of increasing interest rates in the US, especially after the robust July job numbers. This coming Friday Janet Yellen will speak in Jackson Hole and depending on her words traders might get more or less excited to drive equity prices higher. Bank of Japan governor is talking about adding “unprecedented easing”, seeing room for “deeper negative rates”. The Dollar Index last week moved near 94.00 (but bounced 0.47 points in the past two sessions) taking commodity indices higher led by the strong performance of Crude Oil that rallied 23% from August 3rd to the 19th. Saudi Arabia calling for a non-scheduled OPEC meeting stirred up the bullishness of a market that is in fact being influenced a lot by the greenback (in my opinion) – as most commodities for that matter. Coffee future prices were not reacting to the strength of the Brazilian Real (which has traded at 3.1141, the strongest level since July 2015) until news of cold nights in Brazil woke up the bears and quickly reversed a negative chart pattern in New York – mainly today. London also had a very positive recovery on Thursday – but as normally – it did not follow the “C” in the same fashion.
Fundamental Focus
According to two different meteorologist institutes tomorrow morning will be chilled in South of Minas with temperatures at 2 to 4 Celsius in some areas, numbers actually from Somar. Although there is no risk of frost, apparently the forecast released last week was enough to pare the losses of the terminals and with no further selling from money-managers the move up was quick as producers are on the sidelines resilient on their price ideas. Another positive signal is on the firmer differentials for most of the origins, coinciding with a slower pace of shipments from the largest exporter in July – likely to pick up again to near 2.5 mln bags in August. Colombia also had a much lower flow, 483k bags, but that was due to the trucker’s strike in the country. While inventories in Japan and US keep going higher, the basis firming on the FOB and more important the inflow of money in commodities because of currency movements shall make one cautious about betting to hardly on the downside. Funds have reduced their long position and the U6/Z6 spread also came in after non-commercials rolled their large longs. Dilma Roussef shall lose on her last chance of not being impeached on a Senate vote that shall take place until August 31st, allowing Michel Temer to push forward on reforms that can attract more money to the Brazilian economy that has interest rates at 14.25% (a stronger currency also helps for a slower inflation, although there is a legging time of reaction on it). Rains and flowering will be monitored in the Brazilian Coffee belt as it seems they are the next events that could take the Arabica market out of its US$ 125 – US$ 155 cents per lb range. Mild-coffee producers have about two more months until they can bring a better flow of cash deals in, one more point that puts natural-buyers on a waiting mode hoping to get prices closer to their buying ideas. Between here and there the spot shall attract more interest after the end of the summer holidays. On the robusta front Vietnamese exports of 2.33 mln bags in July beat all Brazilian qualities shipment and given the amount of business that took place there in the last 40 days one would expect similar numbers at least in August. It seems like we will continue to see a performance of the “C” linked to the movement of the US dollar (as you can see on the attached chart that show SPGCSI Index, the DXY and the NY market) and on technical break outs that will attract players to bet on short-term moves. Exporters that have shortened differentials and are in pain are likely to revise their offers after meeting their compromises, helping to transpire the tightness that has persisted in the Brazilian internal market. Then if the flowering is very promising and the weather does not bring any surprises we can see a trend change.
 
Technical Focus
December16 contract in NY broke up a top head-and-shoulder formation closing also above the 20day and 40day moving average today. The next resistance is at 147.90, followed by 149.65 and 150.50. Support levels are at 143.80, 141.20 and 139.15. November16 has the 20day moving average at 1837, with next resistance areas at 1845, 1859, 1876 and 1886. Support levels are at 1819, 1768 and 1722.
 
Have a good week and good trades,
Rodrigo Costa