The last two weeks in macroeconomics revealed a more vulnerable financial configuration as new hires and home sales in the US dropped, the Federal Reserve stayed its hand from increasing interest rates after publishing a reduced forecast for economic growth and the Dow Jones, Nasdaq and S&P 500 indices all ended lower. The UK referendum vote to decide whether or not they will remain in the European Union brings a sense of unease to financial markets with investors avoiding making waves until a decision is reached on June 23rd. The coffee market is specifically affected by fundamental news in the last two weeks as a cold front moved through producing regions in Brazil. No frost damage is reported, though it is worth noting that winter has not started in earnest in South America. Colombia continues to feel the effect of heavy rains, expecting an increase in leaf rust and borer beetle and slowing the flow of coffee. The USDA’s global coffee report this week forecast a small oversupply of green coffee citing better yields in Brazil and consistent output in Colombia. Global coffee consumption continues to grow, and is expected to reach 150.8 million 60kg bags, but production could outpace consumers with a forecast of 155.7 million 60-kg bags in 2016/17. Happy Friday.
Since its latest rally starting May 31st, C market pricing climbed from $1.2130 to $1.4075 today, breaking the oscillating trend and regrouping outside of the established range. Open interest fell steadily through the rally, from 195,000 lots on May 31st to 180,700 today, and CFTC reports indicate commercial participants are closing out long positions. Since June 13th, the trend is firm in its upside direction and a close above $1.40 could drive the market to test the recent high of $1.45. In the short-term, the $1.40 level will need to prove itself to be firmly supportive to stay the course plotted in the hourly chart below.
While there is little expectation of a global coffee shortage in the long term, short term weather concerns and dollar devaluation prove to be effective support for the C market. Buyers opting to wait expect cold weather to become milder, for coffee to continue to flow and for another sell-off against recent highs. Those taking action see the US dollar struggling to firm up and know that winter in Brazil is not yet in full swing, particularly noting that in the last five years the most severe rallies occurred between August and September, after winter is past its peak and damage becomes evident. With coffee prices still below the five year average but steadily recovering, buyers are advised to watch the $1.40-$1.45 range next week for signs of further direction. The C market may not be able to maintain this brisk upside pace but technical and fundamental factors appear to buoy it away from a return to $1.20 or below.