Morgan Stanley Coffee Report - August 26, 2020

Arabica lost 85 points in a mixed day of trading, settling 122.10.  The days of tedium in the coffee market are well in the rearview as today’s session left plenty to chew on.  Futures leapt higher on the open as KC broke out of the triangle, key moving averages crossed, and another good sized cert draw was reported.  Prices consolidated in positive territory during the overseas session before peaking at 127.35(+4.40) just past the 8am magic hour.  Spreads tightened in kind (the 1 year yield peaked at 1.3%) and it appeared that the shorts were at risk even as prices hit all-time highs, BRL adjusted, and Brazil was a motivated seller.  It was Brazil in the end that capped the move and sent futures into negative territory, but it was more the FX proxy trade than effective origin hedging.  President Bolsonaro announced he would not be sending the Renda Brasil (social plan) to congress as expected, which markets took as a negative cue for the FX.  While the selloff brought KCZ back inside the pennant and could be seen as a failed breakout, overbought indicators backed off by end of day, trend strength was maintained, and what was an opportunity for a spiral lower found little follow through, perhaps appropriate in the uncertainty given the dual directional risk in coffee.  Volume was sizeable, particularly for a late summer session post FND, and heavy trading was noted in Z/H which closed -1.40, 10 points higher, on 9804 lots.  The active spread’s bid / ask was thin throughout the day, often falling to double digits, which made the volume and relative lack of change all the more impressive.  Certs were fascinating when one looked under the hood of the mere 373 bag decline that obscured a pretty incredible amount of position jockeying.  6816 gradings passed, 4064 failed, pendings fell to 1600 and none of it was apparently Brazil.  Hondurans built 6069 bags in Antwerp, the only increase on the table, yet were below the total approved.  Both Ugandans and Rwandans disappeared in Antwerp - unlikely candidates for regrading given zero have been put up to the board YTD - and NY shed 4842 bags; 749 Sals, 826 Hondos, 2192 Mex, 1000 Nics, and 75 Ugandans.  Robusta fared better, extending its run of new highs, gaining $6 to close 1427.  OI in U remains stubborn, 3119 lots entering the day. 14 deliveries were made between the same commission house.  U/X closed at 94, a tick off the high, on 405 lots of volume.