BLUE LINE = BRLUSD
Prices dropped 5c during the COT report period and had a range of 7.15c. The pressure was due, as we see, by funds who again reversed from long to short. Swap dealers, who may represent institutions, also reversed and small traders sold new. What stands out as well is that Index funds reversed by selling delta. Still, the net option delta on the supplemental increased positively as commercials and othere bought options, driving the implied volatility higher. In futures, commercials were the big buyers as they covered delta and bought forwards. Forward spreads weakened slightly but remained firm while front KN became steady, trading at -1.85 later in the week.
The weakness in the market can be attributed to liquidation in May in the form of both rolling into forwards and outright liquidation. Nevertheless, the total OI increased also because of spreads and new outright buying and selling. What we have seen time and again is that the current activity as shown on the COT is a setup for reversal to the upside. Commercials essentially support the market as funds sell. At some point a reversal will take place that will trigger buying by funds. However, today’s buyers will become tomorrow’s sellers, continuing the cycle. For now, the roll is dominating the market as well as upcoming option expiration which is providing support/resistance at the striking prices as we see on the chart. We will likely see support at the 120.00 level again.
Coffee news is bullish as posted on the forum. Volcafe lowered their Arabica production estimate from 34.2 mm bags to 33.00, but still above the consensus. Lavazza has expressed their assurance that consumption is healthy. However, there are negatives that overshadow the positive developments. Covid remains a challenge, threatening both the supply chain and consumption. Governments are certainly challenged because of covid management. Confidence in Bolsonaro is quickly fading and the Real is reacting, ending on Thursday at around 5.700 in terms of USDBRL. The macro picture is also not as shining as it was earlier in the year. But this may change as, or if, the infrastructure package is approved by the US Congress. Ultimately, adherence to Nagual’s charts and to the striking prices for now is the best trading strategy, in my opinion.
ICE will release the Robusta COT on Monday.
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