Funds are selling freely, without fear it seems. The environment is such that it allows them this freedom. They know that longs are their protection. Commercial buying is overwhelmingly short covering. However with the elevated level of EFP/EFS activity, and with spread legs included in their outright activity, we donít really know what they are actually doing in the outright market. For sure however, trade houses are buying as the market drops for options related activity as well as for commercial activity.
In a normal market the COT report would be bullish. Fundamentals may be on the bearish side but there have been bullish developments as well, like the early frosts that occurred and early flowering that are now taking place. What is hanging over the market has to do more with uncertainties.
Itís difficult to discuss situations throughout the world without interjecting politics, even if only by implication. The trade wars have created a domino effect of collapsing markets, business losses and compromised global economies. The fire in the Amazons has created an uncertainty in future trade arrangements between Brazil and the rest of the world. The other question is what is Brazilís strategy pertaining to coffee production with or without more planting areas.
There is no reason to believe that the market will behave in a manner different than what we have seen for some time. World dynamics will normalize some day, one way or another. As to production, as time goes on we will have a clearer picture. For now we watch the funds. There have been a few times that we noticed on the COT that funds stopped selling and even reversed. At such a time, market behavior will change, even if only temporarily.
Spreads have been softening in the front but firming in the middle months, Sep20, Dec20, possibly because of both front selling by funds and forward selling by origin. The Real has been weak and this has provided the incentive. On Friday, the market dropped an additional cent during the post close. Throughout this week there was very good buying not only by commercials but by other spec groups. The OI in Sep dropped by 25,817 lots during the COT period while the Dec OI increased by 15,429 lots, indicating those traders that were comfortable with their positions and rolled into Dec. The more that funds sell, the more they need to buy back either as outrights or as spreads.
Robusta has been basically just trailing KC and has been very quiet. Notice the continued slight changes in the COT, except for spreads. On Friday, options on spreads in RC were heavily sold probably by trade as they slammed premiums. This to me indicates lower volatility expectations.
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