BLUE LINE = BRLUSD
The falling Real, the pre-US holiday week, the macroeconomic picture and fund reversal all contributed to the drop in prices. Funds began the week by buying and bringing prices up to 164.65, an area recently visited. Longs liquidated forcing funds to sell, once again, and giving commercials and large traders a buying opportunity. Prices ranged 17.00c with a net change of -12.10c and with the market closing at 148.10. Robusta however did not copy the weakness of Arabica. Spreads have been in backwardation there. The UX closed on Friday at 21 premium. As KC dropped to the lows within the COT week, the U arb narrowed to 71.94. It is still at a wide disparity but it began the week at 84.22. RC mostly lags KC but there is a strong element within the RC market.
On Friday the market was heavy but found support in the 150.00 area. Options expiration contained prices between the 2 immediate strikes. Expiration showed no unusual exercises or abandonments. It is worth noting however, that of the 17,776 calls that were abandoned, 3,145 lots were between strikes of 200.00 and 395.00, reflecting the disconnect between expectations and reality that presently exists in the market.
The market continues to be basically bullish in spite of the sharp drops that we frequently see, but there are several factors besides fundamentals that exist, as we know. If other commodities break down coffee will follow. The infrastructure bill in the US is yet to come to fruition but interest rates have been behaving as if the resulting inflation is a given. In Brazil, as in other countries inflation is thriving and interest rates are expected to rise further. Logistics in the movement of coffee is hindered by covid, container shortage and price gouging. The RC market may be reacting to transportation issues but the buying there is mostly in spreads and it is not universal but rather motivated by one entity, from what I understand. Demand is still not back to pre-covid levels as reported by Marex in the 7 July comment. Fundamental data are still not clear as reflected in the ongoing forum debate. The extent of the 2020 damage on plants may be offset by carryover stocks. Imo, nothing is written in stone. At higher prices, those that should be buying are selling. Prices are being moved either way by speculators. The consumer sector does not appear to be present at current levels, while origin is selling to a small degree as the Real weakens. (Q BRLUSD closed Friday on the CME at 0.1902, or USDBRL at 5.2576, or around 5.2351 in Spot.)
As far as KC spreads go, slight strength was seen on Friday but the UZ at -2.85c is certainly not behaving like the UX RC at $21 premium. But the trade seem to be bullish KC spreads as they try to sell puts and buy out of the money calls, (fences). They attempted this strategy several times in the recent past with no success even as the spec long position was increasing, and warehouse stocks were rising and interest rates globally were climbing. Yet, they should not be ignored.
Comments are welcome.