Blue line = BRLUSD
The drop in the total OI is minimal while large in July. Of course, the roll from July to forwards explains some of the disparity but, as we see on the COT, new selling and new buying is taking place in the outright Sep and forward market. We see evidence of this in the days following the COT as minute changes occur the total OI and considerable changes are present in the July OI.
The buyers in the COT are again every other sector, especially commercials. We can add to the list Robusta short buyers, which we haven’t seen for some time. Are we to believe that the sentiment of every other sector is bullish while Arabica managed money shorts are bearish? Or is it that the continued aggressive selling by funds in KC itself is construed as bullish by the remainder of the coffee community? Noteworthy is the number of funds on the short side which is increasing but at a slower rate than previous weeks. Once the July OI drops closer to zero, we can then gage the decreasing bearish sentiment of funds by monitoring the changes in the Sep OI and in the total. For now, we continue to see new fund selling and the behavior of the market is not impressive for bulls. It should be noted that as funds continue to lean on prices we can expect stops to be placed by the longs that we see in the COT. And, when funds will eventually cover, we will see today’s buyers turn sellers on strength, unless something dramatic were to occur, like a frost.
Spreads were active as July was being liquidated. We see several groups liquidating spreads on the COT. Warehouse stocks continue to drop which, as is evident, this fact is unrelated to global stocks but particular to ICE stocks and spreads. If it were a global depletion of stocks, outright prices would be going higher.
Monday will be a day of activity similar to what we see on the COT but also as traders square their books after options expiration. By the time that July open interest diminishes, the Sep OI will be considerably higher than July was. Frost is on the minds of traders as evident in the comparisons of implied volatilities of Aug, Sep and Dec, as pointed out by Oltarsh. Sep is at a premium to the other two.
Fundamentals remain bearish. From the latest USDA report:
“World coffee production for 2020/21 is forecast 9.1 million bags (60 kilograms) higher than the previous year to a record 176.1 million. Brazil is forecast to account for most of the gain as its Arabica crop enters the on-year of the biennial production cycle and Robusta reaches record output. World exports are forecast higher, largely on the strength of Brazil. Global ending stocks are expected to jump to a 6-year high as production outpaces consumption....”
The COT on its own may look bullish but every other indicator points south. Even a strong Real has little impact on coffee prices. Short covering and or a frost will change the picture.
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