BLUE LINE = BRLUSD
After a sharp drop the previous day, the week of the COT began with some weakness but seems to have been building a base once again in the general 180.00 level. On the last day, prices finally broke higher to bring us to the strength that we saw for the remainder of the week and especially on Friday. The COT again reflects two way activity, the net result leaving swap dealers and large traders as buyers. Index funds were again sellers. Commercials ended up as sellers on strength. They were probably buyers while the market showed weakness. Both sides of the commercials were probably against options. There was no evidence of the consumer side buying but there was selling in forwards especially on Friday where selling was present out to H24, likely origin.
Robusta shows a different picture more related to the shipping situation in Viet Nam. The arbitrage was weak indicating a relatively stronger RC to KC but much of the strength in the X21 contract is attributed to the strong spread. The X21F22 had a high close of 41 premium on the 24th. The front few spreads are trading in a backwardation but the U21X21 spread is at a discount. What are we to conclude? Is it that the restrictions on transporting coffee in Viet Nam are not evident in the front month? Or is the buying of X21 in anticipation of restrictions? The spread activity shows liquidation in all groups which could be against each other with commercials not involved as their outright activity does not indicate any spreads, only long liquidation. On the other side were specs, and swap dealers. Options expired on the 18th which could explain some of the liquidation. There were also a large number of EFP, 22,840 lots, which could be related to shipping restrictions but more likely related to the upcoming delivery period. KC spreads have not had the same reaction as RC. There are no transportation restrictions in any other coffee producing and consuming country, with the exception of container shortages in Brazil.
The strength that we are seeing could be related to the cold front approaching in the Brazil coffee regions. It is by no means threatening as temperatures remain elevated. Rains are expected but its benefits to the plants will be limited. We could consider the possibility that prices are catching up to fundamentals but, as we see, the buyers remain speculative and the sellers are those that are supposed to be impacted by the negative fundamentals. Whatever the dynamics of the market are our best strategy continues to be to follow technicals. It canít be denied however that the market is acting well.
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