BLUE LINE = BRLUSD

The KC COT report is delayed until Monday. In RC, the COT shows activity that occurred in a generally weak market. Swap dealers, large traders and managed money sold longs while small traders bought new and commercials covered shorts. On the last day of the COT, RC rose in line with the steady KC market. On this day, the arbitrage closed at 104.93. On the Thursday following the COT report, the arbitrage ended at 106.93. The slight change reflects the buying that took place in Robusta which may have contributed to the KC strength. On Friday, the arbitrage did not keep up with KC as it ended at 116.42. Marcelo Teixeira offers the following in his tweet:

https://twitter.com/tx_marcelo/status/1458869281018556421?s=21



Of course we don’t know who the buyers and sellers were in KC. The market began with strong closes in the first two days and was then beset by weakness that pushed prices below 200.00. Possibly a combination of the roll and the upcoming option expiration we’re the motivators for the selling. Still, as we witnessed the days following the COT week, the weakness proved to be an opportunity. It has been the pattern in the market for prices to bounce in a 10 to 15 c range before breaking away to the upside. To me, this type of value increase is healthier than a sharp and rapid rally that creates an equally sharp correction, such as we saw in July of this year.

The strength that we saw on Thursday and Friday can be attributed to several factors, as reported by different sources. Funds are motivated by inflationary numbers or the market is catching up to fundamentals and possibly other reasons. To me, the activity in the OI and in the non-exchange area is revealing.

The OI in Z dropped by 35,793 lots while the total OI increased slightly for the COT week. Extending the period to the 11th, the Z OI shows and additional drop of 23,655 lots and a slight reduction in the total. This indicates that a great majority of spec participants in the market are satisfied staying long and commercials, which are the major shorts, are happy remaining that way.

In the non-exchange market, for the COT period plus the remaining days, 9,954 EFP were posted with 17,392 EFS. We know that such activity rises during or before notice period but the EFS activity seems extraordinarily high. An EFS is activity done by commercials to accommodate institutions or end users, as I understand it, and it gets hedged in the market. I choose to believe that this EFS activity represents, at least in part, consumer entities. If true then yes, the market is catching up to fundamentals. Friday’s OI will show a sharp drop in Z as options expired. Monday May have some residual activity related to expiration and we’ll get a fresh tone of the market. We may see a correction but it appears that the upside is not finished.

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