In the past two weeks macro developments provoked big swings of risky assets and in the foreign exchange markets due to uncertainties around central banks’ stance in front of mixed data. In the US the non-farm payroll number of May and the revised figure of April took the Dollar Index to early levels of May, surprisingly not affecting commodities. Then last week some polls suggesting that the UK is at the edge of leaving the European Union attracted buying of the greenback erasing half of the June 3rd losses – as of today’s close the basket of currencies remains within the wide range of that day. European equities have lost from 5% to 8% since the beginning of June (I was in Brazil last week), while two of the three major American stock indices are slightly down, 0.31% and 0.85%, respectively for the Dow Jones and the S&P500 – the NASDAQ slid 2.01% during the same period. The SPGCSI index last week touched its highest point since July 2015, the CRB and BCOM edged up to trade near October 2015 and November 2015 highs, respectively. A positive inflow of funds in commodity assets and a perception that inflation is again on the horizon helped to provide fuel for most raw materials. Among the leading gainers of the CRB are: Natural Gas, Arabica Coffee and Raw sugar, all posting rallies of more than 11% in the last thirteen days. Weather related events triggered short-covering (and new-longs) in coffee, which traded at eight-month highs. Calls of cold nights and potential frost risk in some producing areas in Brazil reminded traders on the risk of getting too negative (and short) during the winter in the southern hemisphere.
Coffee Futures: Fundamental Focus
It has been some time since any frost risk in Brazil had come up on the newswires and last week the forecasters alerting for the possibility made farmers hold back on their sales just when a wave of buying flew into the board. Although the chances were small they were more than enough to scare sellers. Rains that were falling in South of Minas and São Paulo acted initially as a strong support, as we could notice on the COT report from Friday June 3rd, when the market saw that funds had sold 7,420 lots and the July16 contract only lost US$ 0.25 cts/lb from July 24th to the 31st.Commercial buying during that week absorbed all the speculative selling and it gave a lift for the market to make the first leg higher. The preoccupation of the agents now will eventually divert slightly from the frost – at least until the next cold front arrives in Brazil – and most will certainly focus on the price/position adjustments of the quality prospects of the Brazilian crop. What I mean is regarding the availability of fine-cups and more significantly the semi-washed crop as the rains diminished the potential of making “cereja descascados”, given that the precipitations caused the trees to drop the cherries that were ready to be harvested to be “pulped”. If not so long ago many were seeing a high probability of certifying non-natural Brazils, now those who were short these qualities are worried about covering their book on the quality, therefore making unlikely that the perceived 500k bags will come to the board. On top of it the fine-cup basis are unlikely to get weaker on the replacement as farmers will hold back their best beans seeking for a higher premium to compensate the production of “less-desirable” beans. While bears say that consuming-countries roasters are long enough the good quality coffees and that the spot/inventories at destination is “plentiful” of cheap offers of milds and fine-cups, exporters/middle-man are worried about the book built on expectations of a big production of such coffees. The local Brazilian industry though must be feeling a relief as availability of lower-grades will increase, a better situation that they were facing in a year that conilon production will be a lot lower than the previous season. For NY one would expect that the structure could firm up, assuming that tenderable coffee will not be around until at least October, or September (if bears are right about the theory that there will be a lot of unsold mild coffee on the spot migrating to the “C”). The wake-up call that the winter in Brazil brought is important as the S&D, overall, is balanced, regardless of the inventories that will be carried over to the next crop-year and independently of being at origins or importing countries. In other words, the market is balanced but has little to no-room for any production losses, either if it happens in the largest origin or any other country. As for the differentials maybe now that arabica prices might move its range from the 115 / 135 to 125-130 / 145-160, the basis can get slightly weaker, but again the bet is still unbalanced risk/reward speaking. On the macro background funds keep buying commodities as the class has outperformed stocks and bonds so far this year, which is good news (for bulls) as long as it lasts. Growth and inflation is needed to help the players, or, as it has been the case in the past eight years, Central Banks must step in (or continue) to ease further the monetary policy, providing the free put that everyone has been addicted too – did anyone say moral-hazard risk?
Coffee Futures: Technical Focus
The steep move up allowed New York to close the little-gaps it had left and it has sustained near the “bigger-gap” left back in October (US$ 139.70 cts and US$ 141.50 cts) – September basis. Record volumes traded last week and the little change of the Open Interest might make one believe that funds are not that long, but on a net-basis it would not be surprising to see the non-commercials with a 15k to 20k position. The resistance levels are on the two points mentioned above, then the 145.00 and 151.05. Supports to be observed are at 134.25, 132.60 and 129.85. London September 16 contract shall find support at 1677, 1652 and 1640 – before eventually trying 1596. On the upside robusta will find resistance at 1702, 1711, and 1748.
Have a good week and good trades,
Rodrigo Costa
In a few words: The inverted correlation of Dollar the strength and commodities weakness has disappeared, at least for now, forcing algo-traders to adjust their models. Commodity-assets under management are up US$ 60 billion since the beginning of the year, or up 36.6%, totaling US$ 220 billion – the highest levels since June 2015. Inflow of US$ 38 billion directed 50% to precious metals, US$ 11 billion to Energy and US$ 8 billion to everything else. While the flow is very positive one would think that fundamentals must be strong to support further gains, as non-commercials are long most of the raw-materials. The Brazilian Real got stronger last week but it is now back to R$ 3.50, where probably it will stay for longer. Assuming the new government is confirmed and is able to implement fiscal reforms (which potentially could firm the currency even more); the measures will give room for the Central Bank to lower one of the highest interest rates of the World, compensating the positive effect of the first. Coffee in NY might have moved up its range, not because of the cold weather, but mainly due to the change of perception about the quality of the Brazilian 16/17 crop provoked by rains and high humidity levels in two major producing areas (more about it on the body of the report). There will be no Coffee Perspective report next week.
Photo credit: Randy Le’Moine Photography via Visual hunt / CC BY
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