Blue Line= BRLUSD
Prices dipped early and then resumed their upward trend not without wide ranges and steep dips. The range was 13.80c with a net change of +8.45c. The XZ arb value widened to 65.04 where it ended. V implied volatility rose to around 52% as we see the supplemental OI increase by 10,000 lots in terms of delta.
The strength is of course attributed to fund buying in both markets. Index funds participated as well indicating the investment aspect of fund involvement. The number of long funds increased by 16 to 97. The number of short funds increased by 1 to 28.
The motivation of funds has been well advertised in market reports and echoed in the forum. Although equities dropped sharply this week, the coffee market began its move while equities were on the highs. We really donít know what has prompted the funds to be committed to buying but itís possible that the coffee market, among other commodity markets, is an alternative to lofty equities. What is obvious in the market is that funds are not motivated by momentum as we have seen in the last few years. As I have stated in the last few reports, funds are continuing to buy even on drops in prices that would, in the past, prompt them to reverse course. Whether this pattern will continue is of course unknown but the number of funds, and the net long position, although high, has been considerably higher historically.
Spreads were less volatile but the implied volatility of CSOs is still relatively high. The ZH seems to be motivated more by the outright market than anything else. However, on Friday, the spread weakened a little as calls on spreads were sold. Warehouse stocks continue to drop and the majority of commercial traders seem to be committed to the long side of spreads in the front months. Some are thinking the other way however. The Z OI stood at 118,204 lots before Fridayís trading. The COT indicates that net long non-commercial longs are up to 86,577 lots. Of course, this the composition of all trading months and swap dealers who, at least in part, are also commercial. In addition, the beginning of September is a little early to anticipate the Z roll. For now, the outright market remains steady and spreads rise in value as forward offers are matched with front buying.
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