BLUE LINE = BRLUSD
The market continued its upward climb, struggling below the 200.00 until it exploded higher, making the high for the period on the 4th and the low on the following day, the last day of the report, as the word “rain” appeared in reports in the coffee market. The two days established the range of 15.55c, and a net change of negative 6.70 for the COT period, as prices ended at the lows.
As a result of the two way volatility, the changes of positions are understated. Commercials were net futures flat but sold both new and old delta. Funds ended net long as algos continue to go with the two momenta. Large traders and small sold. The Robusta market continues to be detached from Arabica resulting in a wide arbitrage range.
Spreads in both markets have been active as we see forward spreads steady. The front spread, ZH traded either side of -2.90, not going anywhere. HK behaved the same as ZH as it stayed around -1.15 during the COT period. The remaining spreads were steady, including very far forward spreads, as origin appeared to be active, taking advantage of the strong coffee market and the weak Real. As we look at the COT report, Managed Money and Large Traders were both active in spreads. My guess is that funds bought spreads from market makers as continued news was released of a compromised crop and of generally bullish fundamentals. The following is an excerpt from the latest ICO report:
“The uncertainty created by weather-related shocks and potential disruptions in trade flows from stricter pandemic-related measures has become a serious threat to the regularity of green coffee supply. Moreover, increasing production costs, including fertilizers and labour costs are expecting to reduce growers’ current gains from increased prices and slow down investments in production.”
In addition, the withdrawal of warehouse stocks has been widely advertised as stocks for the month of October dropped by 146,203 bags. Please note that while Brazil was being deposited while other origins were being withdrawn, for quite some time. Now Brazil is being withdrawn together with other origins, mostly Central Americans. So the combination of several factors is applying support of forward spreads, including forward origin selling, certified withdrawals and outright buying of spreads by specs.
After all is said and done, it remains that specs are the buyers and commercials are the sellers. Consumer buying is not evident yet. As a result, we have sharp moves higher with sharp corrections. But for the bigger picture, Bloomberg has released the following graph:
I don’t think that the market is at the point of a reversal. I also think that the market is eager to see production reports for both ‘21’22 and ‘22’23, and current stocks on hand reports. We can then decide whether we will progress indefinitely higher or see a reversal in the horizon. Buying 10 to 15 cents corrections remains on the menu.