BLUE LINE = BRLUSD
The market was dominated by the roll as over 38,000 U were liquidated. As we look at the total OI change, most of these U were rolled forward. Of course, much of the liquidation is also related to the U option expiration which occurred on Friday, 8/13/21, the only Fibonacci numbers of this century. Excuse the trivia.
We see elevated volumes mostly in the form of spreads. Outright volume actually shrunk. Yet, the market moved higher from the base that it formed last week. It managed a range of 8.95c and a net increase in value of 7.15c. Although the potential sharp drop that was mentioned last report did not occur, there was resistance on the way up at the strikes of 175.00, 180.00 and yesterday at185.00. The source of the strength was large traders, which could have been in part market makers who were covering delta. Small traders and swap dealers were also buyers. This last group could be either end of the chain, or institutional. The sellers were commercials in KC and, unexpectedly, managed money who liquidated 8 long funds and added 4 new short funds, possibly related to expiration in part. Commercials in RC covered shorts. In KC, part of the selling by commercials may well have been origin. There was activity in the form of EFP and outright trading as far out as K23. As a result, spreads in the forward months remained steady. By the end of the day on Friday, all spreads became strong even as late weakness was shown in the outright market. I believe that this late behavior of spreads, in spite of the forward selling is constructive for prices.
There were no surprises in the abandoned and exercised report. Now that U expiration is over, we can expect that the U OI will be very reduced and Z will become the lead month. As to trajectory, hopefully the market will provide some indication this coming week. We may see residual activity carrying over from expiration on Monday. Overall, the market feels steady as friendly news continues to emerge from Brazil. However, as we see, commercials continue to sell. Origin is selling out to 2023 taking advantage of the ICE premium and the inflated Selic. Dryness continues in the coffee regions but, inevitably, it will rain. Whatever damage has occurred during the 2020 drought, the July ‘21 frost and ongoing dryness has not been clearly measured, imo, nor have the carryover stocks. So what we seem to have is strength propelled by speculators rather than by roasters, merchants and processors. This will change if and when shortages are realized.