Morgan Stanley Coffee Report

It is hard to deny that we now need to add a “weather market” into the mix as some meteorologists point to the American model  which is calling for “intense cold” and the risk of frost in Parana , Sao Paulo and southern Minas into the end of this weekend and early Monday.  While not all meteorologists are on the same page, the market took note and capitalized on the upward price trajectory.  A perfect combination of cold weather approaching, a gap higher in the CRB  and an 11 month high in the real proved a strong catalyst for Arabica prices to rally 7 plus cents to levels not seen since August 14th of last year.  Volume reached a record  108.250 lots which eclipsed the 105,000 lots traded on the 11th of June 2010, when prices broke out to the upside as the dollar weakened ahead of “QE2” and the September 2010 contract coincidentally (?) traded $1.40, the same level  September 2016  traded today.   If, as mentioned in yesterday’s report, there were a fair chunk of short term spec weather longs in the market, suffice it to say that that number grew exponentially today.  Traders also sought to define their risk by buying options primarily in the September series which caused volatility to explode above 40% which is where Sep vol “back in the day” traditionally traded ahead of frost season.  Technically a very strong performance and with the macro and weather factors at play, a shift in any of the three can provide greater insight as to how much of this run has been dollar, weather and/or chart driven.   Open interest fell by 4,678 lots, let’s see after today’s volume and action we verify new longs or more of the same short covering.