Weaker Real Pushes Coffee Down

Weaker Real Pushes Coffee Down

Political uncertainties coupled with a criticized performance of the Central Bank (for been slow and too heavy on its response) caused great volatility to the Brazilian Real, which virtually traded at R$ 4.00 against the US dollar, a level that has been reached sixteen years ago when the country was afraid of Lula getting elected – which proved to be a justified fear.

Brazil’s higher-than-expected inflation helped the currency to weaken, but the main reason comes from the disastrous interventionist maneuvers of the current government showing international investors the danger of investing in a country where rules can suddenly change posing a risk for any business plan.

Worse still is not having a candidate who inspires confidence in putting the country on the right track. The interest rate spread to treasuries being “tight”, with little or no risk premium for someone to bet in favor of Brazil, drives away the hot money and the investors who are “married” to long-term investments are rushing to hedge their exposures – adding on demand for US dollars.

It is true though that the greenback also retreated against other currencies, even the Euro on the expectations that the ECB will end its asset purchase program.

Commodities indices moved down last week, but the today the CRB has closed unchanged comparing to last Monday. Orange juice, soybeans, coffee and corn lost 3.5% to 5% in the past five days though.

Fundamental Focus

Arabica coffee in New York could not sustain above US$ 120.00 cents per pound and the July contract traded only US$ 0.35 cts / lb away from its low. The proximity to the FND (first notice day) shall still bring price fixation from producers that have held back their sales after a positive momentum that was lost just in just a couple of sessions. Technically specs can speed up new shorts, especially if US$ 115.30 is pierced.

For Brazilian farmers the weakness of the BRL last week allowed the “C” to trade at the highs of early 2017, converting the quotes into cents pennies of Reais per pound. It is worth noting that other origins have not had the same “benefit” in receiving “more” in their local currencies for the coffee sold internally.

In Guatemala ANACAFE has reported that just under 1% of the crop was lost due to the activity the Volcano El Fogo, while sadly more than 100 people have died and more than the double suffered injuries.

Robusta terminal has showed weakness as well, and the USDA forecast for a larger Vietnamese crop in 18/19, or 29.9 million bags comparing to the current 29.3 million bags, shall still bring further selling pressure. Conies’ harvest continues to indicate that the output of Brazil can surprise to the upside, and that is happening without Espirito Santo reaching full potential this year. It remains to be seen if demand will pent up and spread over all available coffees, including certified inventories.

Differentials for natural beans are still not reflecting the weakness that everyone wants to see. Coffee flow will start to pick up speed from now on with farmers harvesting a large crop and yields being closely followed.

The Brazilian winter begins next Wednesday, June 20, and those who stubbornly are bull the flat-price, or bearish the basis, just want at least one or two cold weather to help their positioning. No one is worried about frost, and if it becomes a worry, it is still very cheap to buy upside protections for eventual cash-flow stresses.

Non-commercials, who had liquidated a good portion of their shorts, are likely holding again about 90,000 contracts of gross-short, considering the fall of the board since Thursday. The position is far from the 117 thousand lots, the record set on April 17th, but the funds can renew their bets on the downside taking NY to new lows in the next few weeks if no cold spell shows up and eventually build a new record short.

The performance of the Real may accelerate New York’s move to one side or the other, although in the short-term the need for origins to sell shall weigh not to let prices return above US$ 120.00 cents per pound very easily.

Technical Focus

As mentioned above, a break under US$ 115.30 cents/lb shall bring speculators in a more aggressive sell mode, likely forcing future prices towards US$ 112.45, and then support levels would be at 111.05, 110.20 and 105.50. Resistance starts at 119.70, followed by 121.90, 123.15 and 124.95 – all basis July contract. In London September contract has key support at 1,671, followed by 1,640 and 1,602 dollars per ton. On the upside 1,758 is the first resistance and then 1,811.

Have a nice week and good trades,

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