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Arabica coffee prices pause after major rally
Ole Hansen
Head of Commodity Strategy, Saxo Bank Group
Summary: Arabica coffee prices soared by nearly 33% over the course of the past month, but the rally has now paused after hedge funds cut their record short position in half.
Arabica coffee (KCZ8 or COFFEENYDEC18) has paused after rallying by close to one-third during the past month. Renewed BRL strength before and after the first round of the Brazilian election on October 7 was the event that helped trigger a major squeeze.
In the weeks and months up until this event, hedge funds had been accumulating a record and ultimately unsustainable short position. Hedge funds will continue to sell into weakness – or buy into strength – until the technical and/or fundamental picture changes. In this case, it was primarily a change in the technical outlook that created the mad rush towards the exit.
During a four-week period up until October 16 hedge funds cut their net-short in half. With that, the need to continue buying has been reduced, at least as long a renewed upside push above $1.26/lb is avoided.
In the weeks and months up until this event, hedge funds had been accumulating a record and ultimately unsustainable short position. Hedge funds will continue to sell into weakness – or buy into strength – until the technical and/or fundamental picture changes. In this case, it was primarily a change in the technical outlook that created the mad rush towards the exit.
During a four-week period up until October 16 hedge funds cut their net-short in half. With that, the need to continue buying has been reduced, at least as long a renewed upside push above $1.26/lb is avoided.
As mentioned in a previous update, the first major level of resistance was $1.26/lb, the 38.2% retracement of the 2016-2018 sell-off. Having found resistance at this level, the market is now consolidating with focus on BRL and the second round of the Brazilian presidential election on October 28. In order for the bullish sentiment to be maintained, coffee needs to find support ahead of $1.14/lb, something it has so far managed to do.
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