The Missing Component of a Coffee Rally has Come!

Andres Agredo, November 23, 2017

A compelling reason why the Arabica Coffee Contract can go up at least $ 20 cents from the low of $ 124.80, and the timing is now:

Record net short specs, commercials net long at high levels, pre-and post-flowering dryer than normal conditions in a large Brazil’s coffee area, relatively low global coffee stocks, inventories in consumer countries finally getting lower, exports in Brazil and Colombia slowing down, irregular rains in main producing areas of Brazil that threatened the expected bumper crop 2018/2019 very needed to replenish inventories, technical signals calling for the culmination of the downtrend and the formation of a bottom over the $ 125 area (for the Mar’18 contract), are some fundamental and technical indications that the price of Arabica Coffee “should” undergo a significant rally; however, it has only shown lackluster rallies that have not exceeded $ 5 cents after reaching the area $ 127.50 – $ 125 on early October. Why?

Historically, the price of Arabica Coffee has shown an inverse correlation with the US Dollar (US Dollar Index) -like most of the commodities valued in this currency- especially with the Dollar against the Brazilian Real (USD / BRL), naturally as it’s the main producer and exporter of the raw material globally.

If we analyze the behavior of these three assets during the last two years, we see that the last significant rallies of more than $ 20 cents in the price of Arabica Coffee have been taken place ONLY when the US Dollar Index and USD / BRL have experienced significant declines as well, which, as we can see in the following chart, since early October’17 (when the price of the C Contract began to build the bottom) had not happened yet, until now.

The fact that since last November 15th, both referents of the Greenback have begun to fall and with greater force at the close of November 22th, in my opinion showing an important technical signal of a bearish continuation, I am led to think that the only component that was missing to see a rally in the caffeinated commodity has come: A really bearish US Dollar.


Coffee C / US Dollar Index / USDBRL

Disclaimer: past performance is not necessarily indicative of future results.

See you at the next post!

Cafe Trading Advisors / Commodity Trading Advisor, NFA Member.

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