The market began with a promising tone but could not hold the 130.00 level, just as it could not hold the 120.00 area this week. Volume decreased but not volatility. Although the commercial interest in the market has remained high, other sectors are reducing. Managed money shorts are merely 8,992 lots while longs are 29,542. The total of which is a shadow of what we have seen in the past. The supplemental OI, the delta portion, also dropped and implied volatility dropped with it.
We know that fund short covering has been the driver to the upside for the last few weeks, virtually the only driver. But for this COT period we ask the questions, did commercial selling continue on the way down, as did fund buying? Or did funds reverse causing further pressure that has continued beyond the COT week? Some commercials did sell in forward months as the Real broke even as coffee prices fell. This selling continued on Friday as well. While funds covered, every other group sold. What took place during the drop from the high of 130.65 to the low of 115.65 in two days is uncertain. Itís possible that in the present financial environment the aim of many traders could be to reduce risk and abstain. New positions appear light.
The MayJul spread was weak while other spreads remained steady. The roll is of course responsible for the front spread weakness and origin selling, likely, is the cause for the forward spreads strength.
The foresight that hubblerock and others expressed is coming to fruition. Processing and exporting are both impeded. We could rely on domestic stocks but the same obstacles apply. The inability to grade, process and move coffee in producing countries is the same in consuming countries as the work force becomes more restricted.
The fall of the Real and other currencies of producing countries is a contributor to the extent that it creates ideal selling opportunities for origin and may attract speculative selling. But the correlation of coffee and the Real has not been very consistent. However the impact of the virus on coffee and the currency is similar.
The disruption of exports is at the heart of both markets. And there doesnít seem to be a light at the end of the CVirus tunnel in Brazil. The refusal of the administration to impose limits and restrictions on the public will increase the spread of the virus, thereby crippling the economy even further.
For now what we are seeing in the market is a combination of investors and traders searching for direction, the roll and the upcoming May option expiration on Friday. It remains a good day trading market even though it is sporadic, unpredictable and thin.