Morgan Stanley Coffee Report August 4, 2020

Arabica posted a mixed session, falling 105 points to 117.90 on roughly average volume for the recent rally. Prices gapped lower on the opening, a reaction to a number of factors – additional Brazilian hedging, the selloff in Robusta, the COT, and a strengthening DXY.  While the KC COT short covering was expected to a large degree, another standout report in London helped urge prices lower and KC with them in sympathy.  The 17,596 lots of short covering were a record, and 2 of the 3 largest managed money gross short covering events have now occurred in the past 2 weeks.  Returning to Arabica, prices recovered some of their losses on roaster buying of the dip, yet by 7:30am EDT the market was down 330 points and it appeared the rally had been capped.  The BRL fell roughly 2% before finding support, and KC spreads moved in opposition to recent trends with U/Z gaining a tick to -2.60 and Z0/Z1 backing out to -5.20, 60 points wider as Z/H closed -1.80, 25 points weaker, and H/K -90, down 15.  Nonetheless a sustained intraday commodity bid and the tailwinds of last week’s chart breakout across daily, weekly, and monthly measures helped overcome to a large degree what was a laundry list of reliable headwinds, with futures even briefly going positive around 11:15am.  While the day ultimately recorded a loss, with final prints even lower (116.70 last), it was not quite the clear rejection of the rally many had expected.  Interestingly the active contract by OI is now KCZ as OI flipped the page by 20 lots.  This is unusually early, 4 trading days before the index roll, and one wonders if it will revert briefly.  Robusta closed up $7 at 1351, a fairly remarkable performance given the early weakness and stubborn adversity to higher prints throughout parts of KC’s intraday climb.  It should be noted that while the prompt contract posted gains, the 2nd month X contract fell $11 to 1350 as U/X closed $1 in backwardation.  This will be fascinating to watch as the potential delivery of conilons to the board faces off with what is otherwise believed to be a tight Robusta balance sheet.