NON-COMMERCIALS, COMMERCIALS AND INDEXES
Risky assets fell in the past five days on a continuation of dollar strength with the markets now betting there is a 90% chance of a December FED lift-off. Japan entering the 5th recession since 2008, oil sliding close to US$ 40.00 a barrel and the belief that the Euro might hit parity on the divergent monetary policy from the two major CBs made investors cautious selling off equities and commodities. The tragic event in Paris last Friday, following Thursday’s sad attack in Beirut, had driven European stocks lower and crude oil higher earlier today. Stocks recovered then, while crude has traded back and forth on the higher geopolitical risks that some perceive to be relatively contained (?). The weakness on the currencies of key coffee producing countries added a negative tone on the boards pushing New York to a new low since January 3rd 2014 while London for now has respected the 1497 low of September 23rd (both considering the second month continuous chart). As First Notice Day is approaching for the Dec15 contract traders have been concentrating their activities on the spreads.
Coffee Perspective: Fundamental Focus
The president of Brazil is being pressure by Lula (her “creator”) to change the finance minister as the current one has been facing a lot of opposition within the party in power. The market perceives it as being positive for the economy as Henrique Meirelles would be a signal of more independence for both the ministry and the Central Bank, refreshing the attempts of getting further orthodox measures approved. The Real has rallied on the rumor, but it could not sustain on last week’s risk-off mode. CECAFE, the Brazilian Exports body, released the October 15 shipments at 3,215,720 bags, significantly less than what the Trade Ministry has informed. The pace of conillon’s exports, although smaller than the previous month, remains high comparing to historical data for the period. Overall the November exports shall not come down as much as bulls would like to see, helping the pipeline not to get much “thinner” in the short-term. Crop estimates for the major origin were released by the IBGE saying that 15/16 shall be at 43.6 mln bags (32.92 +10.84) and by Olam mentioning that 16/17 output shall be between 60 to 62 mln bags, according to a Reuters’ wire. The trade house though see a deficit, even with an above 60mln bags crop forecasted, due to rising consumption, said the head of coffee last week at Sintercafe Conference, words also confirmed by the company CEO who sees coffee currently undervalued. Funds remain in selling mode helped by a poor technical picture and last minute price fixation ahead of the FND. The COT came out with non-commercials adding 4,854 contracts to their gross-short, all of it absorbed by commercials that see value at current levels. Weather is normalizing in most of the coffee areas, but the north of the Espirito Santo in Brazil stills has not enough rains forecasted for the time being. The health of the trees in Indonesia and part of Brazil will likely have an impact on the yields, but as we are far away from finding out about it no one is eager to take a positive stance on a deteriorating macro background that has the US dollar expected to evaluate further. Differentials firmed up across the producers likely to limit the physical flow unless futures prices move northward. ICE arabica certs keep being de-certified, a trend that I think will accelerate in the first half of 2016 when the basis will be even tighter for milds and high-grade naturals. The GCA stocks in October fell 168,880 bags, totaling 5,948,228 bags (slightly below the 6.0 mln bags that were on the warehouses a year ago). Société Générale Cross Asset Research sees index funds buying 8,561 lots of “C” coffee between the 8th and the 14th of January, considering the settlement of November 11th (US$ 120.15 cts). Non-commercials are likely now with a gross-short of nearly 60K bags, or about 3K lots away from the last time we saw futures bouncing on short-covering. It does not say that prices cannot continue to slide, but does selling short at 118,20 looks attractive? Bears argue that the commercial gross-long at 102K lots, likely higher by now (a new record) will make support disappear on a new dive for prices – I am not sure (remember that the commercial long is by nature stronger than the commercial shorts). Options strategies have been mixed, lately with quite a bit of downside protection being bought. The arbitrage of NY/LN tells us that robusta needs to follow arabica prices closer from now on otherwise some arabica qualities will then be more attractive. For that matter we will need either funds to push the market down or one has to bet that Vietnam will pound the board. Mar16 contract is usually the listed future month that receive most of the price fixation from milds, so bears will also have to count on them to cap a move higher.
Coffee Perspective: Technical Focus
New lows being made for the “C” with a steep downtrend line where resistances have not being breached make the picture negative but at the same time more bearish news needs to keep flowing to avoid a (short-term?) short-covering. Back in July when funds had a 59k lots short position NY was trading at 123ish cts. A short covering of 25K lots drove the market up to 140 cts. Then on September a 63K lots with prices at 118ish cts had funds buying back 23K lots taking second month quotes to 140 cts again in mid-October. US$ 140.00 has been a strong resistance point also and it would not be different now unless the perception of the fundamental alters, but at the same time there will be less selling on a new short-covering than before, which seasonally also could help the market. Also there is the index fund story, which the buying is not as large but adds to the equation of the tightness during the first half of 2016. A move above 121.70 shall start triggering some buy stops, with more sizeable ones probably only to be found near 125.65. Support tomorrow will be at 114.80 and then 111.25. For robusta Jan16 needs to be above 1563 if it wants to avoid the test of the 1513 low. Several moving averages are crossing at the 1600 level, where the market could get traction to try again the recent high at 1637.
Have a good week and good trades,
Rodrigo Costa